G.R. No.

141297            October 8, 2001

DOMINGO R. MANALO, petitioner,
vs.
COURT OF APPEALS (Special Twelfth Division) and PAIC SAVINGS AND MORTGAGE
BANK, respondents.

PUNO, J.:

This petition for certiorari seeks the review of the Decision of the Court of Appeals in C.A.-G.R. SP.
No. 50341 promulgated December 23, 1999, which affirmed an Order issued by the Regional Trial
Court, Branch 112, Pasay City, in Civil Case No. 9011 dated December 9, 1998.

On July 19, 1983, S. Villanueva Enterprises, represented by its president, Therese Villanueva
Vargas, obtained a loan of three million pesos (P3,000,000.00) and one million pesos
(P1,000,000.00) from the respondent PAIC Savings and Mortgage Bank and the Philippine
American Investments Corporation (PAIC), respectively. To secure payment of both debts, Vargas
executed in favor of the respondent and PAIC a Joint First Mortgage1 over two parcels of land
registered under her name. One of the lots, located in Pasay City with an area of nine hundred
nineteen square meters (919 sq. m.) and covered by TCT No. 6076, is the subject of the present
case. Section 2 of the mortgage contract states that "the properties mortgaged therein shall include
all buildings and improvements existing on the mortgaged property at the time of the execution of the
mortgage contract and thereafter."2

S. Villanueva Enterprises defaulted in paying the amortizations due. Despite repeated demands from
the respondent, it failed to settle its loan obligation. Accordingly, respondent instituted extrajudicial
foreclosure proceedings over the mortgaged lots. On August 22, 1984, the Pasay City property was
sold at a public auction to the respondent itself, after tendering the highest bid. The respondent then
caused the annotation of the corresponding Sheriff's Certificate of Sale3 on the title of the land on
December 4, 1984. After the lapse of one year, or the statutory period extended by law to a
mortgagor to exercise his/her right of redemption, title was consolidated in respondent's name for
failure of Vargas to redeem.

On October 29, 1986, the Central Bank of the Philippines filed a Petition4 for assistance in the
liquidation of the respondent with the Regional Trial Court. The petition was given due course in an
Order5 dated May 19, 1987.

It appears that from the years 1986 to 1991, Vargas negotiated with the respondent (through its then
liquidator, the Central Bank) for the repurchase of the foreclosed property. The negotiations,
however, fizzled out as Vargas cannot afford the repurchase price fixed by the respondent based on
the appraised value of the land at that time. On October 4, 1991, Vargas filed a case for annulment
of mortgage and extrajudicial foreclosure sale before Branch 116 of the Pasay City Regional Trial
Court. On July 22, 1993, the court rendered a decision6 dismissing the complaint and upholding the
validity of the mortgage and foreclosure sale. On appeal, the appellate court upheld the assailed
judgment and declared the said mortgage and foreclosure proceedings to be in accord with
law.7 This decision of the Court of Appeals subsequently became final and executory when we
summarily dismissed Vargas' Petition for Review on Certiorari for having been filed beyond the
reglementary period.8

In the meantime, on June 22, 1992, respondent petitioned the Regional Trial Court, Branch 112, of
Pasay City, herein court a quo, for the issuance of a writ of possession for the subject property in
Civil Case No. 9011. This is in view of the consolidation of its ownership over the same as
mentioned earlier. Vargas and S. Villanueva Enterprises, Inc. filed their opposition thereto. After
which, trial ensued.

During the pendency of Civil Case No. 9011 (for the issuance of a writ of possession), Vargas, on
December 23, 1992, executed a Deed of Absolute Sale9 selling, transferring, and conveying
ownership of the disputed lot in favor of a certain Armando Angsico. Notwithstanding this sale,
Vargas, still representing herself to be the lawful owner of the property, leased the same to petitioner
Domingo R. Manalo on August 25, 1994. Pertinent provisions of the lease agreement10 state:

"3. (a) The lease is for a period of ten year lease (sic), involving 450 square meters, a portion
of the above 919 square meter property.

x x x (d) The LESSEE has to introduce into the said 450 square meter premises
improvements thereon (sic) consisting of one story building to house a Karaoke Music
Restaurant Business, which improvements constructed thereof (sic), upon the termination of
the lease contract, by said LESSEE be surrendered in favor of the LESSOR (sic).''11

Later, on June 29, 1997, Armando Angsico, as buyer of the property, assigned his rights therein to
petitioner.12

On April 21, 1998, the court a quo granted the petition for the issuance of the Writ of
Possession.13 The writ was subsequently issued on April 24, 1998, the pertinent portion of which
reads:14

"NOW THEREFORE you are hereby commanded that you cause oppositors THERESE
VILLANUEVA VARGAS and S. VILLANUEVA ENTERPRISES, INC. and any and all persons
claiming rights or title under them, to forthwith vacate and surrender the possession of
subject premises in question known as that parcel of land and improvements covered by
TCT No. 6076 of the Registry of Deeds of Pasay City; you are hereby further ordered to take
possession and deliver to the petitioner PAIC SAVINGS AND MORTGAGE BANK the
subject parcel of land and improvements."

Shortly, on May 8, 1998, S. Villanueva Enterprises and Vargas moved for its quashal.15 Thereafter
on June 25, 1998, petitioner, on the strength of the lease contract and Deed of Assignment made in
his favor, submitted a Permission to File an Ex-parte Motion to Intervene.16 It bears mentioning,
however, that before petitioner sought intervention in the present case, he had separately instituted
a Complaint for Mandamus, docketed as Civil Case No. 98-0868 before another branch17 of the
Pasay City RTC to compel PAIC Bank to allow him to repurchase the subject property.

On October 7, 1998, the court a quo denied the Motion to Quash and Motion to Intervene filed
respectively by Vargas and petitioner.18 A Motion for Reconsideration and a Supplemental Motion for
Reconsideration were filed by the petitioner which, however, were similarly denied on December 9,
1998.

Petitioner then sought relief with the Court of Appeals, filing therein a Petition for Certiorari. While
this was awaiting resolution, he entered into another lease agreement,19 this time with the
respondent, represented by its liquidator, over the same 450 sq. m. portion of the lot. The contract
fixed a period of one month beginning January 28, 1999, renewable for another month at the
exclusive option of the lessor, respondent PAIC Bank.
On December 23, 1999, the appellate court rendered the impugned Decision, dismissing the
petition, thus:

"All told, WE find the Order, subject of the instant Petition for Certiorari and Prohibition, to be
not without rational bases and we observe that the court a quo, in issuing its questioned
Order, committed no grave abuse of discretion amounting to lack of jurisdiction.

WHEREFORE, the Petition for Certiorari and Prohibition is hereby DISMISSED and the
assailed December 9, 1998 Order is AFFIRMED in all respects.

SO ORDERED."20

Hence, this appeal, where petitioner raises and argues the following legal issues:

"I. Whether or not public respondent acted without or in excess of its jurisdiction and/or was
patently in error when it affirmed the denial of petitioner's motion for intervention, despite the
fact that he has a legal interest, being a lessee and an assignee of the property subject
matter of this case.

II. Whether or not the public respondent committed grave abuse of discretion when it held
that what are required to be instituted before the liquidation court are those claims against
the insolvent banks only considering that the private respondent bank is legally dead due to
insolvency and considering further that there is already a liquidation court (Regional Trial
Court of Makati, Branch 57, docketed as Spec. Pro. No. M-1280) which is exclusively vested
with jurisdiction to hear all matters and incidents on liquidation pursuant to Section 29,
Republic Act No. 265, otherwise known as The Central Bank Act, as amended.

III. Whether or not the public respondent committed grave abuse of discretion and/or was
patently in error in affirming the ruling of the trial court, totally disregarding the arguments
raised in petitioner's supplemental motion for reconsideration only through a minute order
and without taking into consideration the fact that there is a pending action in another court
(RTC, Pasay City, Branch 231 ) which presents a prejudicial question to the case at bar.

IV. Whether or not the petitioner is estopped from questioning private respondent's
ownership when it entered into a contract of lease involving the property in question."21

We will first resolve the jurisdictional and procedural questions raised by the petitioner.

I.

Petitioner postulates that the lower court should have dismissed respondent's "Ex-Parte Petition for
Issuance of Writ of Possession" in Civil Case No. P-9011 for want of jurisdiction over the subject
matter of the claim. The power to hear the same, he insists, exclusively vests with the Liquidation
Court pursuant to Section 29 of Republic Act No. 265, otherwise known as The Central Bank
Act.22 He then cites our decision in Valenzuela v. Court of Appeals,23 where we held that "if there is a
judicial liquidation of an insolvent bank, all claims against the bank should be filed in the liquidation
proceeding." For going to another court, the respondent, he accuses, is guilty of forum shopping.

These contentions can not pass judicial muster. The pertinent portion of Section 29 states:
 "x x x The liquidator designated as hereunder provided shall, by the Solicitor General, file a
petition in the Regional Trial Court reciting the proceedings which have been taken and
praying the assistance of the court in the liquidation of such institution. The court shall have
jurisdiction in the same proceedings to assist in the adjudication of disputed claims against
the bank or non-bank financial intermediary performing quasi-banking functions and the
enforcement of individual liabilities of the stockholders and do all that is necessary to
preserve the assets of such institution and to implement the liquidation plan approved by the
Monetary Board, x x x"24 (emphasis supplied.)

Petitioner apparently failed to appreciate the correct meaning and import of the above-quoted law.
The legal provision only finds operation in cases where there are claims against an insolvent bank.
In fine, the exclusive jurisdiction of the liquidation court pertains only to the adjudication of claims
against the bank. It does not cover the reverse situation where it is the bank which files a claim
against another person or legal entity.

This interpretation of Section 29 becomes more obvious in the light of its intent. The requirement that
all claims against the bank be pursued in the liquidation proceedings filed by the Central Bank is
intended to prevent multiplicity of actions against the insolvent bank and designed to establish due
process and orderliness in the liquidation of the bank, to obviate the proliferation of litigations and to
avoid injustice and arbitrariness.25 The lawmaking body contemplated that for convenience, only one
court, if possible, should pass upon the claims against the insolvent bank and that the liquidation
court should assist the Superintendents of Banks and regulate his operations.26

It then ought to follow that petitioner's reliance on Section 29 and the Valenzuela case is misplaced.
The Petition for the Issuance of a Writ of Possession in Civil Case No. 9011 is not in the nature of a
disputed claim against the bank. On the contrary, it is an action instituted by the respondent
bank itself for the preservation of its asset and protection of its property. It was filed upon the
instance of the respondent's liquidator in order to take possession of a tract of land over which it has
ownership claims.

To be sure, the liquidator took the proper course of action when it applied for a writ in the Pasay City
RTC. Act 3135,27 entitled An Act to Regulate the Sale of Property Under Special Powers Inserted In
or Annexed To Real Estate Mortgages, mandates that jurisdiction over a Petition for Writ of
Possession lies with the court of the province, city, or municipality where the property subject thereof
is situated. This is sanctioned by Section 7 of the said Act, thus:

"SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition
the Court of First Instance of the province or place where the property or any part thereof is
situated, to give him possession thereof during the redemption period, furnishing bond in an
amount equivalent to the use of the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act x x x"28 (emphasis supplied)

Since the land subject of this controversy is located in Pasay City, then the city's RTC should rightly
take cognizance of the case, to the exclusion of other courts.

Anent petitioner's auxiliary contention that respondent should be held guilty of forum shopping for not
filing the case in the liquidation court, suffice it to state here that the doctrine only ponders situations
where two (or more) cases are pending before different tribunals.29 Well to point, we have laid down
the yardstick to determine whether a party violated the rule against forum shopping as where the
elements of litis pendentia are present or where a final judgment in one case will amount to res
judicata in the other.30 Inasmuch as the case at bar is the only one filed by the respondent for the
issuance of a writ of possession over the subject property, there is no occasion for the doctrine to
apply.

Petitioner next casts doubt on the capacity of the respondent to continue litigating the petition for the
issuance of the writ. He asserts that, being under liquidation, respondent bank is already a "dead"
corporation that cannot maintain the suit in the RTC. Hence, no writ may be issued in its favor.

The argument is devoid of merit. A bank which had been ordered closed by the monetary board
retains its juridical personality which can sue and be sued through its liquidator. The only limitation
being that the prosecution or defense of the action must be done through the liquidator.31 Otherwise,
no suit for or against an insolvent entity would prosper. In such situation, banks in liquidation would
lose what justly belongs to them through a mere technicality.32

That the law allows a bank under liquidation to participate in an action can be clearly inferred
from the third paragraph of the same Section 29 of The Central Bank Act earlier quoted,
which authorizes or empowers a liquidator to institute actions, thus: "x x x and he (liquidator)
may in the name of the bank or non-bank financial intermediary performing quasi-banking
functions and with the assistance of counsel as he may retain, institute such actions as may
be necessary in the appropriate court to collect and recover accounts and assets of such
institution or defend any action filed against the institution."33 (emphasis supplied.)

It is therefore beyond dispute that respondent was legally capacitated to petition the court a quo for
the issuance of the writ.

II.

Petitioner likewise proffers one other procedural obstacle, which is the pendency of Civil Case No.
98-0868 in Branch 231 of Pasay City RTC. The said action is the complaint he filed against the
respondent for the latter to receive and accept the redemption price of eighteen million pesos for the
subject property. He argues that the primary issue therein constitutes a prejudicial question in
relation to the present case in that if the Court therein will grant petitioner's prayer, then this will
necessarily negate the possessory writ issued by the court a quo.

Again, we are not persuaded. A prejudicial question is one which arises in a case the resolution of
which is a logical antecedent of the issue involved therein, and the cognizance of which pertains to
another tribunal.34 It generally comes into play in a situation where a civil action and a criminal action
are both pending and there exists in the former an issue which must be preemptively resolved before
the criminal action may proceed, because howsoever the issue raised in the civil action is resolved
would be determinative juris et de jure of the guilt or innocence of the accused in the criminal case.
The rationale behind the principle of prejudicial question is to avoid two conflicting decisions.35

Here, aside from the fact that Civil Case No. 98-0868 and the present one are both civil in nature
and therefore no prejudicial question can arise from the existence of the two actions,36 it is apparent
that the former action was instituted merely to frustrate the Court's ruling in the case at bar granting
the respondent the right to possess the subject property. It is but a canny and preemptive maneuver
on the part of the petitioner to delay, if not prevent, the execution of a judgment adverse to his
interests. It bears stressing that the complaint for mandamus was filed only on May 7, 1998, sixteen
days after the lower court granted respondent's petition and thirteen days after it issued the writ. It
cannot then possibly prejudice a decided case.

At any rate, it taxes our imagination why the questions raised in Case No. 98-0868 must be
considered determinative of Case No. 9011. The basic issue in the former is whether the
respondent, as the purchaser in the extra-judicial foreclosure proceedings, may be compelled to
have the property repurchased or resold to a mortgagor's successor-in-interest (petitioner): while
that in the latter is merely whether the respondent, as the purchaser in the extrajudicial foreclosure
proceedings, is entitled to a writ of possession after the statutory period for redemption has expired.
The two cases, assuming both are pending, can proceed separately and take their own direction
independent of each other.

III.

Having disposed of the jurisdictional and procedural issues, we now come to the merits of the case.
Petitioner seeks intervention in this case by virtue of the lease agreement and the deed of
assignment executed in his favor by the mortgagor (Vargas) and an alleged buyer (Angsico) of the
land, respectively. He posits that as a lessee and assignee in possession of the foreclosed real
estate, he automatically acquires interest over the subject matter of the litigation. This interest is
coupled with the fact that he introduced improvements thereon, consisting of a one-storey building
which houses a karaoke-music restaurant, allegedly to the tune of fifteen million pesos
(P15,000,000.00). Enforcing the writ, he adds, without hearing his side would be an injustice to him.

Intervention is a remedy by which a third party, not originally impleaded in the proceeding, becomes
a litigant therein to enable him to protect or preserve a right or interest which may be affected by
such proceeding.37 The pertinent provision is stated in Section 1, Rule 19 of the 1997 Rules of Civil
Procedure, thus:

"SECTION 1. Who may intervene. — A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property in the
custody of the court or of an officer thereof may, with leave of court, be allowed to intervene
in the action. The court shall consider whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties, and whether or not the
intervenor's rights may be fully protected in a separate proceeding."38

Intervention is not a matter of right but may be permitted by the courts only when the statutory
conditions for the right to intervene is shown.39 Thus, the allowance or disallowance of a motion to
intervene is addressed to the sound discretion of the court.40 In determining the propriety of letting a
party intervene in a case, the tribunal should not limit itself to inquiring whether "a person (1) has a
legal interest in the matter in litigation; (2) or in the success of either of the parties; (3) or an interest
against both; (4) or when is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof."41 Just as important, as we
have stated in Big Country Ranch Corporation v. Court of Appeals,42 is the function to consider
whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the
original parties, and whether or not the intervenor's rights may be fully protected in a separate
proceeding.

The period within which a person may intervene is also restricted. Section 2, Rule 19 of the 1997
Rules of Civil Procedure requires:

"SECTION 2. Time to intervene. — The motion to intervene may be filed at any time before
the rendition of judgment by the trial court, x x x"

After the lapse of this period, it will not be warranted anymore. This is because, basically,
intervention is not an independent action but is ancillary and supplemental to an existing litigation.43
Taking into account these fundamental precepts, we rule that the petitioner may not properly
intervene in the case at bar. His insistence to participate in the proceeding is an unfortunate case of
too little, too late.

In the first place, petitioner's Ex-parte Permission to File a Motion to Intervene was submitted to the
RTC only on June 25, 1998. At that stage, the lower court had already granted respondent's petition
for the writ in an Order dated April 21, 1998. It had issued the Writ of Possession on April 24, 1998.
Petitioner's motion then was clearly out of time, having been filed only at the execution stage. For
that reason alone, it must meet the consequence of denial. While it is true that on May 8, 1998,
Vargas and S. Villanueva Enterprises moved to quash the writ, that did not in any way affect the
nature of the RTC's Order as an adjudication on the merits. The issuance of the Order is in essence
a rendition of judgment within the purview of Section 2, Rule 19.

Allowing petitioner to intervene, furthermore, will serve no other purpose but to unduly delay the
execution of the writ, to the prejudice of the respondent. This cannot be countenanced considering
that after the consolidation of title in the buyer's name, for failure of the mortgagor to redeem, the writ
of possession becomes a matter of right.44 Its issuance to a purchaser in an extrajudicial foreclosure
is merely a ministerial function.45 As such, the court neither exercises its official discretion nor
judgment.46 If only to stress the writ's ministerial character, we have, in previous cases, disallowed
injunction to prohibit its issuance,47 just as we have held that issuance of the same may not be
stayed by a pending action for annulment of mortgage or the foreclosure itself.48

Even if he anchors his intervention on the purported interest he has over the land and the
improvements thereon, petitioner, still, should not be allowed to do so. He admits that he is a mere
lessee and assignee. Whatever possessory rights he holds only emanate from that of Vargas, from
whom he leased the lot, and from whom his assignor/predecessor-in-interest bought it. Therein lies
the precariousness of his title. Petitioner cannot validly predicate his supposed interest over the
property in litigation on that of Vargas, for the simple reason that as early as December 4, 1985, the
latter has already been stripped of all her rights over the land when she, as mortgagor, failed to
redeem it. A mortgagor has only one year within which to redeem her foreclosed real estate.49 After
that period, she loses all her interests over it. This is in consonance with Section 78 of the General
Banking Act, 50 viz.:

"x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or the provisions
of this Act, the mortgagor or debtor whose real property has been sold at public auction,
judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking
or credit institution, within the purview of this Act shall have the right, within one year after
the sale of the real estate mortgage as a result of the foreclosure of the respective mortgage,
to redeem the property by paying the amount fixed by the court in the order or execution x x
x"51 (emphasis supplied.)

Being herself bereft of valid title and rights, Vargas can not legitimately convey any to some other
person. She could not have lawfully sold the land to Angsico nor leased it to petitioner for her own
account. It is axiomatic that one can not transmit what one does not have.52 It ought to follow that
petitioner could not have acquired any right or interest from Vargas.

Withal, all is not lost for the petitioner. He can still fully protect his rights in Civil Case No. 98-0868 or
the complaint for mandamus he filed before Branch 231 of the Pasay City RTC. There, he can
ventilate his side to a fuller extent as that would be the more appropriate venue for elucidating
whatever legal basis he alleges in compelling the respondent to sell to him the currently disputed
land.
 IV.

This brings us to petitioner's final point. He briefly asserts that his act of entering into a lease
contract with the respondent should not affect his right to redeem the subject property.

The possible legal implication of the lease on the petitioner's act of trying to redeem the disputed lot
is a question which, in our opinion, can best be resolved in the mandamus complaint. Whether the
agreement must be construed as a waiver on his part of exercising his purported right of redemption
is an issue best left for the court therein to decide. Whether by acknowledging the legality of the
respondent's claim and title over the land at the time of the execution of the contract, he likewise
perpetually barred himself from redeeming the same is a matter which can be addressed most aptly
in that pending action. Hence, there is presently no need for us to squarely rule on this ultimate
point.

IN VIEW WHEREOF, finding no cogent reason to disturb the assailed Decision, the instant petition is
hereby DENIED.

SO ORDERED.

Davide, Jr., C.J., Pardo, and Ynares-Santiago, JJ., concur.

Kapunan, J., on official leave.
G.R. No. 158261             December 18, 2006

IN RE: PETITION FOR ASSISTANCE IN THE LIQUIDATION OF THE RURAL BANK OF BOKOD
(BENGUET), INC., PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner,
vs.
BUREAU OF INTERNAL REVENUE, respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the revised Rules of Court, praying that
this Court set aside the Orders, dated 17 January 20032 and 13 May 2003,3 of the Regional Trial
Court (RTC) of La Trinidad, Benguet, sitting as the Liquidation Court of the closed Rural Bank of
Bokod (Benguet), Inc. (RBBI), in Spec. Proc. No. 91-SP-0060.

There is no dispute as to the antecedent facts of the case, recounted as follows:

In 1986, a special examination of RBBI was conducted by the Supervision and Examination Sector
(SES) Department III of what is now the Bangko Sentral ng Pilipinas (BSP),4 wherein various loan
irregularities were uncovered. In a letter, dated 20 May 1986, the SES Department III required the
RBBI management to infuse fresh capital into the bank, within 30 days from date of the advice, and
to correct all the exceptions noted. However, up to the termination of the subsequent general
examination conducted by the SES Department III, no concrete action was taken by the RBBI
management. In view of the irregularities noted and the insolvent condition of RBBI, the members of
the RBBI Board of Directors were called for a conference at the BSP on 4 August 1986. Only one
RBBI Director, a certain Mr. Wakit, attended the conference, and the examination findings and
related recommendations were discussed with him. In a letter, dated 4 August 1986, receipt of which
was acknowledged by Mr. Wakit, the SES Department III warned the RBBI Board of Directors that,
unless substantial remedial measures are taken to rehabilitate the bank, it will recommend that the
bank be placed under receivership. In a subsequent letter, dated 17 November 1986, a copy of
which was sent to every member of the RBBI Board of Directors via registered mail, the SES
Department III reiterated its warning that it would recommend the closure of the bank, unless the
needed fresh capital was immediately infused. Despite these notices, the SES Department III
received no word from RBBI or from any of its Directors as of 28 November 1986.5

In a meeting held on 9 January 1987, the Monetary Board of the BSP decided to take the following
action –

Rural Bank of Bokod (Benguet), Inc. – Report on its examination as of June 16, 1986, its
placement under receivership
 ACTION TAKEN

Finding to be true the statements of the Special Assistant to the Governor and Head,
Supervision and Examination Sector (SES) Department III, in her memorandum dated 28
November 1986 submitting a report on the general examination of the Rural Bank of Bokod
(Benguet), Inc. as of 16 June 1986, that the financial condition of the rural bank is one of
insolvency and its continuance in business would involve further losses to its depositors and
creditors, x x x

xxxx

[T]he Board decided as follows:

a. To forbid the bank to do business in the Philippines and place its assets and
affairs under receivership in accordance with Section 29 of R.A. No. 265, as
amended.

b. To designate the Special Assistant to the Governor and Head, SES Department
III, as Receiver of the bank;

c. To refer the cases of irregularities/frauds to the Office of Special Investigation for

further investigation and possible filing of appropriate charges against the following
present/former officers and employees of the bank:

xxxx

d. To include the names of the above-mentioned present and former officers and
employees of the bank in the list of persons barred from employment in any financial
institution under the supervision of the Central Bank without prior clearance from the
Central Bank.6

A memorandum and report, dated 28 August 1990, were submitted by the Director of the SES
Department III concluding that the RBBI remained in insolvent financial condition and it can no
longer safely resume business with the depositors, creditors, and the general public. On 7
September 1990, the Monetary Board, after determining and confirming the said memorandum and
report, ordered the liquidation of the bank and designated the Director of the SES Department III as
liquidator.7

On 10 April 1991, the designated BSP liquidator of RBBI caused the filing with the RTC of a Petition
for Assistance in the Liquidation of RBBI, docketed as Spec. Proc. No. 91-SP-0060.8 Subsequently,
on 2 June 1992, the Monetary Board transferred to herein petitioner Philippine Deposit Insurance
Corporation (PDIC) the receivership/liquidation of RBBI.9

PDIC then filed, on 11 September 2002, a Motion for Approval of Project of Distribution10 of the
assets of RBBI, in accordance with Section 31, in relation to Section 30, of Republic Act No. 7653,
otherwise known as the New Central Bank Act. During the hearing held on 17 January 2003, the
respondent Bureau of Internal Revenue (BIR), through Atty. Justo Reginaldo, manifested that PDIC
should secure a tax clearance certificate from the appropriate BIR Regional Office, pursuant to
Section 52(C) of Republic Act No. 8424, or the Tax Code of 1997, before it could proceed with the
dissolution of RBBI. On even date, the RTC issued one of the assailed Orders,11 directing PDIC to
comply with Section 52(C) of the Tax Code of 1997 within 30 days from receipt of a copy of the said
order. Pending compliance therewith, the RTC held in abeyance the Motion for Approval of Project
of Distribution. On 13 May 2003, the second assailed Order12 was issued, in which the RTC, in
resolving the Motion for Reconsideration filed by PDIC, ruled as follows –

ORDER

Submitted for resolution is petitioner’s motion for reconsideration of the order of this court
dated January 17, 2003 holding in abeyance the motion for approval of the project of
distribution pending their compliance with a tax clearance from the Bureau of Internal
Revenue.

Petitioner in their motion state that Section 52-C of Republic Act 8424 does not cover closed
banking institutions like the Rural Bank of Bokod as the law that covers liquidation of closed
banks is Section 30 of Republic Act No. 7653 otherwise known as the new Central Bank
Law.

Commenting on the motion for reconsideration the Bureau of Internal Revenue states that
the only logic why the Bureau is requesting for a tax clearance is to determine how much
taxes, if there be any, is due the government.

The court believes and so holds that petitioner should still secure the necessary tax
clearance in order for it to be cleared of all its tax liabilities as regardless of what law covers
the liquidation of closed banks, still these banks are subject to payment of taxes mandated
by law. Also in its motion for approval of the project of distribution, paragraph 2, item 2.2
states that there are unremitted withholding taxes in the amount of P8,767.32.

This shows that indeed there are still taxes to be paid. In order therefore that all taxes due
the government should be paid, petitioner should secure a tax clearance from the Bureau of
Internal Revenue.

Wherefore, based on the foregoing premises, the motion for reconsideration filed by
petitioner is hereby DENIED for lack of merit.13

Hence, PDIC filed the present Petition for Review on Certiorari, under Rule 45 of the revised Rules
of Court, raising pure questions of law. It made a lone assignment of error, alleging that –

THE COURT A QUO ERRED IN APPLYING THE PROVISION OF SECTION 52-C OF

REPUBLIC ACT NO. 8424 DIRECTING THE SUBMISSION OF TAX CLEARANCE FOR
CORPORATIONS CONTEMPLATING DISSOLUTION ON A BANK ORDERED CLOSED
AND PLACED UNDER RECEIVERSHIP AND, THEREAFTER, UNDER LIQUIDATION, BY
THE MONETARY BOARD PURSUANT TO SECTION 30 OF REPUBLIC ACT NO. 7653.14

PDIC argues that the closure of banks under Section 30 of the New Central Bank Act is summary in
nature and procurement of tax clearance as required under Section 52(C) of the Tax Code of 1997 is
not a condition precedent thereto; that under Section 30, in relation to Section 31, of the New Central
Bank Act, asset distribution of a closed bank requires only the approval of the liquidation court; and
that the BIR is not without recourse since, subject to the applicable provisions of the Tax Code of
1997, it may therefore assess the closed RBBI for tax liabilities, if any.

In its Comment, the BIR countered with the following arguments: that the present Petition for Review
on Certiorari under Rule 45 of the revised Rules of Court is not the proper remedy to question the
Order, dated 17 January 2003, of the RTC because said order is interlocutory and cannot be the
subject of an appeal; that Section 52(C) of the Tax Code of 1997 applies to all corporations,
including banks ordered closed by the Monetary Board pursuant to Section 30 of the New Central
Bank Act; that the RTC may order the PDIC to obtain a tax clearance before proceeding to rule on
the Motion for Approval of Project of Distribution of the assets of RBBI; and that the present
controversy should not have been elevated to this Court since the parties are both government
agencies who should have administratively settled the dispute.

This Court finds that there are only two primary issues for the resolution of the Petition at bar, one
being procedural, and the other substantive. The procedural issue involves the question of whether
the Petition for Review on Certiorari under Rule 45 of the revised Rules of Court is the proper
remedy from the assailed Orders of the RTC. The substantive issue deals with the determination of
whether a bank ordered closed and placed under receivership by the Monetary Board of the BSP
still needs to secure a tax clearance certificate from the BIR before the liquidation court approves the
project of distribution of the assets of the bank.

This Court shall first proceed with the procedural issue on the appropriateness of the remedy taken
by PDIC from the assailed RTC Orders.

The differences between an appeal by certiorari under Rule 4515 of the revised Rules of Court and an
original action for certiorari under Rule 6516 of the same Rules have been laid down by this Court in
the case of Atty. Paa v. Court of Appeals,17 to wit –

a. In appeal by certiorari, the petition is based on questions of law which the appellant
desires the appellate court to resolve. In certiorari as an original action, the petition raises the
issue as to whether the lower court acted without or in excess of jurisdiction or with grave
abuse of discretion.

b. Certiorari, as a mode of appeal, involves the review of the judgment, award or final order
on the merits. The original action for certiorari may be directed against an interlocutory order
of the court prior to appeal from the judgment or where there is no appeal or any other plain,
speedy or adequate remedy.

c. Appeal by certiorari must be made within the reglementary period for appeal. An original
action for certiorari may be filed not later than sixty (60) days from notice of the judgment,
order or resolution sought to be assailed.

d. Appeal by certiorari stays the judgment, award or order appealed from. An original action
for certiorari, unless a writ of preliminary injunction or a temporary restraining order shall
have been issued, does not stay the challenged proceeding.

e. In appeal by certiorari, the petitioner and respondent are the original parties to the action,
and the lower court or quasi-judicial agency is not to be impleaded. In certiorari as an original
action, the parties are the aggrieved party against the lower court or quasi-judicial agency
and the prevailing parties, who thereby respectively become the petitioner and respondents.

f. In certiorari for purposes of appeal, the prior filing of a motion for reconsideration is not
required (Sec. 1, Rule 45); while in certiorari as an original action, a motion for
 reconsideration is a condition precedent (Villa-Rey Transit vs. Bello, L-18957, April 23,
1963), subject to certain exceptions.

g. In appeal by certiorari, the appellate court is in the exercise of its appellate jurisdiction and
power of review, while in certiorari as an original action, the higher court exercises original
jurisdiction under its power of control and supervision over the proccedings of lower courts.

Guided by the foregoing distinctions, this Court, in perusing the assailed RTC Orders, dated 17
January 2003 and 13 May 2003, reaches the conclusion that these are merely interlocutory in nature
and are not the proper subjects of an appeal by certiorari under Rule 45 of the revised Rules of
Court.

This Court has repeatedly and uniformly held that a judgment or order may be appealed only when it
is final, meaning that it completely disposes of the case and definitively adjudicates the respective
rights of the parties, leaving thereafter no substantial proceeding to be had in connection with the
case except the proper execution of the judgment or order. Conversely, an interlocutory order or
judgment is not appealable for it does not decide the action with finality and leaves substantial
proceedings still to be had.18

The RTC Orders presently questioned before this Court has not disposed of the case nor has it
adjudicated definitively the rights of the parties in Spec. Proc. No. 91-SP-0060. They only held in
abeyance the approval of the Project of Distribution of the assets of RBBI until PDIC, as liquidator,
acquires a tax clearance from the BIR. Indubitably, there are still substantial proceedings to be had
after PDIC presents the required tax clearance to the trial court, since the Project of Distribution of
assets still has to be finalized and approved.

PDIC avers that the RTC Orders of 17 January 2003 and 13 May 2003 are final because, as this
Court pronounced in the case of Pacific Banking Corporation Employees’ Organization (PaBCEO) v.
Court of Appeals,19 an order of the liquidation court allowing or disallowing a claim is a final order and
may be the subject of an appeal. It further asserts that the legal issue of whether RBBI should
secure a tax clearance is a "disputed claim," which was already allowed by the RTC in its assailed
Orders, thus, making the latter final.

This Court is unconvinced. The foregoing arguments of PDIC result from a strained interpretation of
law and jurisprudence, and are raised in an apparent attempt to justify a very obvious faux pas on its
part. While it is true that in liquidation proceedings, the settlement of disputed or contentious claims
may require a full-dress hearing and the resolution of legal issues,20 it does not follow that all legal
issues resolved in the course of the liquidation proceedings would automatically be tantamount to an
allowance or disallowance of a disputed or contentious claim. In Spec. Proc. No. 91-SP-0060
pending before the RTC, there can be no doubt that the claim of the BIR against RBBI consists of
the unpaid tax liabilities of the latter. The BIR contends that it could only determine the existence and
correct amount of the tax liabilities of RBBI if PDIC, as liquidator of the bank, secures a tax
clearance from the appropriate BIR Regional Office. The acquirement of a tax clearance is not the
claim of the BIR against RBBI, it is only the means by which to ascertain such claim. Whatever tax
liabilities the BIR may claim against RBBI can still be disputed before the RTC by the PDIC, as
liquidator of the bank, whether as to the existence or computation of the said tax liabilities, and it is
the ruling of the RTC on such matters that may constitute a final order which definitively settles the
claim of the BIR. The mere grant by the RTC of the motion requiring PDIC, as liquidator of RBBI, to
secure a tax clearance, does not yet constitute an adjudication of the claim of the BIR. Hence, the
assailed RTC Orders, dated 17 January 2003 and 13 May 2003, are clearly interlocutory in nature.
As a general rule, an interlocutory order is not appealable until after the rendition of the judgment on
the merits, given that a contrary rule would delay the administration of justice and unduly burden the
courts. This Court, however, has also held that an original action for certiorari under Rule 65 of the
revised Rules of Court is an appropriate remedy to assail an interlocutory order when (1) the tribunal
issued such order without or in excess of jurisdiction or with grave abuse of discretion, and (2) the
assailed interlocutory order is patently erroneous and the remedy of appeal would not afford
adequate and expeditious relief.21 Thus, despite this Court’s finding that PDIC, as the liquidator of
RBBI, availed itself of the wrong remedy by filing an appeal by certiorari under Rule 45 of the revised
Rules of Court, We shall adopt a positive and pragmatic approach, and, instead of dismissing the
instant Petition outright, it shall treat the same as an original action for certiorari under Rule 65 of the
same Rules, in consideration of the crucial issues and substantial arguments already presented by
the concerned parties before this Court.22

II

Having disposed of the procedural issue, this Court now addresses the substantive issue of whether
RBBI, as represented by its liquidator, PDIC, still needs to secure a tax clearance from the BIR
before the RTC could approve the Project of Distribution of the assets of RBBI.

The BIR anchors its position that a tax clearance is necessary on Section 52(C) of the Tax Code of
1997, which provides –

SEC. 52. Corporation Returns. –

xxxx

(C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation

shall, within thirty days (30) after the adoption by the corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by the Securities and
Exchange Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such resolution or plan and
such other information as the Secretary of Finance, upon recommendation of the
Commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and
Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by
rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which
certificate shall be submitted to the Securities and Exchange Commission.

To implement the foregoing provision, the BIR still relies on the regulations it jointly issued with the
Securities and Exchange Commission (SEC) in 1985, when the Tax Code of 1977 was still in effect
and a similar provision could be found in Section 46(C) thereof. The full text of the regulations is
reproduced below –

BIR-SEC REGULATIONS NO. 1

SUBJECT: Regulations to Implement the Provisions of Executive Order No. 1026, Amending
Section 46(c) of the National Internal Revenue Code of 1977, as amended, Requiring
Dissolving Corporations to File Information Returns and Secure Tax Clearance from the
Commissioner of Internal Revenue, and Providing Adequate Penalties for Violations Thereof.

TO: All Internal Revenue Officers and Others Concerned.

Pursuant to the provisions of Section 277, in relation to Section 4 of the National Revenue
Code of 1977, as amended, the following regulations are hereby promulgated.

Section 1. Scope. – These regulations shall govern the procedure for the issuance of tax
clearance certificates to dissolving corporations. This shall include corporations intending to
dissolve or liquidate the whole or any part of its capital stocks, as well as, corporations which
have been notified of possible involuntary dissolution by the Securities and Exchange
Commission.

Section 2. Requirements in case of dissolution. – a) Every Corporation shall, within thirty (30)
days after

- the adoption by the corporation of a resolution or plan for the dissolution of the corporation,
or for the liquidation of the whole or any part of its capital stock, or

- the receipt of an order of suspension by the Securities and Exchange Commission in case
of involuntary dissolution,

file their income tax returns covering the income earned by them from the beginning of the
taxable year up to date of such dissolution.

In addition thereto, they shall submit within the same period and verified under oath, the
following documents:

1. a copy of the articles of incorporation and by-laws;

2. a copy of the resolution authorizing dissolution; and

3. balance sheet as of the date of dissolution and a profit and loss statement
covering the period from the beginning of the taxable year to the date of dissolution.

b) The Securities and Exchange Commission whenever it issues an order of involuntary

dissolution or suspension of the primary franchise or certificate of registration of a
corporation, shall at the same time furnish the Commissioner of Internal Revenue a copy of
such order.

Section 3. Tax clearance certificate. – a) Within thirty (30) days from receipt of the
documents mentioned in the preceding Section, the Commissioner of Internal Revenue, or
his duly authorized representative, shall issue the corresponding tax clearance certificate
(BIR Form No. 17.61) for the corporation which will be dissolved.

b) The Securities and Exchange Commission shall issue the final order of dissolution only
after a certificate of tax clearance has been submitted by the dissolving
corporation: Provided, that in case of involuntary dissolution, the Securities and Exchange
Commission may nevertheless proceed with the dissolution if thirty (30) days after receipt of
the suspension order no tax clearance has yet been issued.
 Section 4. Penalty. – Failure to render the return and secure the certificate of tax clearance
as above-mentioned shall subject the officer(s) of the corporation required by law to file the
return under Section 46(a) of the National Internal Revenue Code of 1977, as amended, to a
fine of not less than P5,000.00 or imprisonment of not less than two (2) years, and shall
make them liable for all outstanding or unpaid tax liabilities of the dissolving corporation.

Section 5. Effectivity. – These regulations shall apply to all corporate dissolution taking place
on or after May 14, 1985.

Section 6. Repealing Clause. – All revenue regulations, orders and circulars which are
inconsistent herewith are hereby modified accordingly.

The afore-quoted Tax Code provision and regulations refer to a voluntary dissolution and/or
liquidation of a corporation through its adoption of a resolution or plan to that effect, or an involuntary
dissolution of a corporation by order of the SEC. They make no reference at all to a situation similar
to the one at bar in which a banking corporation is ordered closed and placed under receivership by
the BSP and its assets judicially liquidated. Now, the determining question is, whether Section 52(C)
of the Tax Code of 1997 and BIR-SEC Regulations No. 1 could be made to apply to the present
case.

This Court rules in the negative.

First, Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No. 1 regulate the
relations only as between the SEC and the BIR, making a certificate of tax clearance a prior
requirement before the SEC could approve the dissolution of a corporation. In Spec. Proc. No. 91-
SP-0060 pending before the RTC, RBBI was placed under receivership and ordered liquidated by
the BSP, not the SEC; and the SEC is not even a party in the said case, although the BIR is. This
Court cannot find any basis to extend the SEC requirements for dissolution of a corporation to the
liquidation proceedings of RBBI before the RTC when the SEC is not even involved therein.

It is conceded that the SEC has the authority to order the dissolution of a corporation pursuant to
Section 121 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the
Philippines, which reads –

Sec. 121. Involuntary dissolution. – A corporation may be dissolved by the Securities and

Exchange Commission upon filing of a verified complaint and after proper notice and hearing
on the grounds provided by existing laws, rules and regulations.

The Corporation Code, however, is a general law applying to all types of corporations, while the New
Central Bank Act regulates specifically banks and other financial institutions, including the
dissolution and liquidation thereof. As between a general and special law, the latter shall prevail
– generalia specialibus non derogant.23

The liquidation of RBBI is undertaken according to Sections 30 of the New Central Bank Act, viz –

Sec. 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head
of the supervising or examining department, the Monetary Board finds that a bank or quasi-
bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;

(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its
liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or
creditors; or

(d) has wilfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking institution.

For a quasi-bank, any person of recognized competence in banking or finance may be

designated as receiver.

The receiver shall immediately gather and take charge of all the assets and liabilities of the
institution, administer the same for the benefit of its creditors, and exercise the general
powers of a receiver under the Revised Rules of Court but shall not, with the exception of
administrative expenditures, pay or commit any act that will involve the transfer or disposition
of any asset of the institution: Provided, That the receiver may deposit or place the funds of
the institution in non-speculative investments. The receiver shall determine as soon as
possible, but not later than ninety (90) days from take over, whether the institution may be
rehabilitated or otherwise placed in such a condition that it may be permitted to resume
business with safety to its depositors and creditors and the general public: Provided, That
any determination for the resumption of business of the institution shall be subject to prior
approval of the Monetary Board.

If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business in accordance with the next preceding paragraph, the Monetary Board shall notify
in writing the board of directors of its findings and direct the receiver to proceed with the
liquidation of the institution. The receiver shall:

(1) file ex parte with the proper regional trial court, and without requirement of prior notice or
any other action, a petition for assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance Corporation for general
application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted
by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the
receiver after due notice, adjudicate disputed claims against the institution, assist the
enforcement of individual liabilities of the stockholders, directors and officers, and decide on
other issues as may be material to implement the liquidation plan adopted. The receiver shall
pay the cost of the proceedings from the assets of the institution.

(2) convert the assets of the institution to money, dispose of the same to creditors and other
parties, for the purpose of paying the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the Philippines and he may, in
the name of the institution, and with the assistance of counsel as he may retain, institute
such actions as may be necessary to collect and recover accounts and assets of, or defend
any action against, the institution. The assets of an institution under receivership or
 liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or liquidation, be exempt from
any order of garnishment, levy, attachment, or execution.

The actions of the Monetary Board taken under this section or under Section 29 of this Act
shall be final and executory, and may not be restrained or set aside by the court except on
petition for certiorari on the ground that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for
certiorari may only be filed by the stockholders of record representing the majority of the
capital stock within ten (10) days from receipt by the board of directors of the institution of the
order directing receivership, liquidation or conservatorship.

The designation of a conservator under Section 29 of this Act or the appointment of a

receiver under this section shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a precondition to the designation of a
receiver.

Section 30 of the New Central Bank Act lays down the proceedings for receivership and liquidation
of a bank. The said provision is silent as regards the securing of a tax clearance from the BIR. The
omission, nonetheless, cannot compel this Court to apply by analogy the tax clearance requirement
of the SEC, as stated in Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1,
since, again, the dissolution of a corporation by the SEC is a totally different proceeding from the
receivership and liquidation of a bank by the BSP. This Court cannot simply replace any reference
by Section 52(C) of the Tax Code of 1997 and the provisions of the BIR-SEC Regulations No. 1 to
the "SEC" with the "BSP." To do so would be to read into the law and the regulations something that
is simply not there, and would be tantamount to judicial legislation.

It should be noted that there are substantial differences in the procedure for involuntary dissolution
and liquidation of a corporation under the Corporation Code, and that of a banking corporation under
the New Central Bank Act, so that the requirements in one cannot simply be imposed in the other.

Under the Corporation Code, the SEC may dissolve a corporation, upon the filing of a verified
complaint and after proper notice and hearing, on grounds provided by existing laws, rules, and
regulations.24 Upon receipt by the corporation of the order of suspension from the SEC, it is required
to notify and submit a copy of the said order, together with its final tax return, to the BIR. The SEC is
also required to furnish the BIR a copy of its order of suspension. The BIR is supposed to issue
a tax clearance to the corporation within 30 days from receipt of the foregoing documentary
requirements. The SEC shall issue the final order of dissolution only after the corporation has
submitted its tax clearance; or in case of involuntary dissolution, the SEC may proceed with the
dissolution after 30 days from receipt by the BIR of the documentary requirements without a tax
clearance having been issued.25 The corporation is allowed to continue as a body corporate for three
years after its dissolution, for the purpose of prosecuting and defending suits by or against it, to
settle and close its affairs, and to dispose of and convey its property and distribute its assets, but not
for the purpose of continuing its business. The corporation may undertake its own liquidation, or at
any time during the said three years, it may convey all of its property to trustees for the benefit of its
stockholders, members, creditors, and other persons in interest.26

In contrast, the Monetary Board may summarily and without need for prior hearing, forbid the
banking corporation from doing business in the Philippines, for causes enumerated in Section 30 of
the New Central Bank Act; and appoint the PDIC as receiver of the bank. PDIC
shall immediately gather and take charge of all the assets and liabilities of the closed bank and
administer the same for the benefit of its creditors. The summary nature of the procedure for the
involuntary closure of a bank is especially stressed in Section 30 of the New Central Bank Act, which
explicitly states that the actions of the Monetary Board under the said Section or Section 29 shall be
final and executory, and may not be restrained or set aside by the court except on a Petition
for Certiorari filed by the stockholders of record of the bank representing a majority of the capital
stock. PDIC, as the appointed receiver, shall file ex parte with the proper RTC, and without
requirement of prior notice or any other action, a petition for assistance in the liquidation of the bank.
The bank is not given the option to undertake its own liquidation.

Second, the alleged purpose of the BIR in requiring the liquidator PDIC to secure a tax clearance is
to enable it to determine the tax liabilities of the closed bank. It raised the point that since the PDIC,
as receiver and liquidator, failed to file the final return of RBBI for the year its operations were
stopped, the BIR had no way of determining whether the bank still had outstanding tax liabilities.

To our mind, what the BIR should have requested from the RTC, and what was within the discretion
of the RTC to grant, is not an order for PDIC, as liquidator of RBBI, to secure a tax clearance; but,
rather, for it to submit the final return of RBBI. The first paragraph of Section 30(C) of the Tax Code
of 1997, read in conjunction with Section 54 of the same Code, clearly imposes upon PDIC, as the
receiver and liquidator of RBBI, the duty to file such a return. The pertinent provisions are
reproduced below for reference –

SEC. 52. Corporation Returns. –

xxxx

(C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation

shall, within thirty days (30) after the adoption by the corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by the Securities and
Exchange Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such resolution or plan and
such other information as the Secretary of Finance, upon recommendation of the
Commissioner, shall, by rules and regulations, prescribe.

xxxx

SEC. 54. Returns of receivers, Trustees in Bankruptcy or Assignees. – In cases wherein

receivers, trustees in bankruptcy or assignees are operating the property or business of a
corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees
shall make returns of net income as and for such corporation, in the same manner and form
as such an organization is hereinbefore required to make returns, and any tax due on the
income as returned by receivers, trustees or assignees shall be assessed and collected in
the same manner as if assessed directly against the organizations of whose businesses or
properties they have custody or control.

Section 54 of the Tax Code of 1997 imposes a general duty on all receivers, trustees in bankruptcy,
and assignees, who operate and preserve the assets of a corporation, regardless of the
circumstances or the law by which they came to hold their positions, to file the necessary returns on
behalf of the corporation under their care.

The filing by PDIC of a final tax return, on behalf of RBBI, should already address the supposed
concern of the BIR and would already enable the latter to determine if RBBI still had outstanding tax
liabilities.
The unreasonableness and impossibility of requiring a tax clearance before the approval by the RTC
of the Project of Distribution of the assets of the RBBI becomes apparent when the timeline of the
proceedings is considered.

The BIR can only issue a certificate of tax clearance when the taxpayer had completely paid off his
tax liabilities. The certificate of tax clearance attests that the taxpayer no longer has any outstanding
tax obligations to the Government.

Should the BIR find that RBBI still had outstanding tax liabilities, PDIC will not be able to pay the
same because the Project of Distribution of the assets of RBBI remains unapproved by the RTC;
and, if RBBI still had outstanding tax liabilities, the BIR will not issue a tax clearance; but, without the
tax clearance, the Project of Distribution of assets, which allocates the payment for the tax liabilities,
will not be approved by the RTC. It will be a chicken-and-egg dilemma.

The Government, in this case, cannot generally claim preference of credit, and receive payment
ahead of the other creditors of RBBI. Duties, taxes, and fees due the Government enjoy priority only
when they are with reference to a specific movable property, under Article 2241(1) of the Civil Code,
or immovable property, under Article 2242(1) of the same Code. However, with reference to the
other real and personal property of the debtor, sometimes referred to as "free property," the taxes
and assessments due the National Government, other than those in Articles 2241(1) and 2242(1) of
the Civil Code, will come only in ninth place in the order of preference.27

Thus, the recourse of the BIR, after assessing the final return and examining all other pertinent
documents of RBBI, and making a determination of the latter’s outstanding tax liabilities, is to
present its claim, on behalf of the National Government, before the RTC during the liquidation
proceedings. The BIR is expected to prove and substantiate its claim, in the same manner as the
other creditors. It is only after the RTC allows the claim of the BIR, together with the claims of the
other creditors, can a Project for Distribution of the assets of RBBI be finalized and approved. PDIC,
then, as liquidator, may proceed with the disposition of the assets of RBBI and pay the latter’s
financial obligations, including its outstanding tax liabilities. And, finally, only after such payment, can
the BIR issue a certificate of tax clearance in the name of RBBI.

Third, the evident void in current statutes and regulations as to the relations among the BIR, as tax
collector of the National Government; the BSP, as regulator of the banks; and the PDIC, as the
receiver and liquidator of banks ordered closed by the BSP, is not for this Court to fill in. It is up to
the legislature to address the matter through appropriate legislation, and to the executive to provide
the regulations for its implementation.

It is for these reasons that the RTC committed grave abuse of discretion, and committed patent
error, in ordering the PDIC, as the liquidator of RBBI, to first secure a tax clearance from the
appropriate BIR Regional Office, and holding in abeyance the approval of the Project of Distribution
of the assets of the RBBI by virtue thereof.

Although this Court rules in favor of PDIC, in the sense that a tax clearance is not a prerequisite to
the approval of the Project of Distribution of the assets of RBBI, it cannot uphold its argument that
the Spec. Proc. No. 91-SP-0060 is summary in nature.

Section 30(d) of the New Central Bank Act gives the Monetary Board of the BSP the power to,
summarily and without need for prior hearing, forbid a bank or quasi-bank from doing business in the
Philippines and designating the PDIC as receiver of the banking institution. It bears to emphasize
that: (1) the power is granted to the Monetary Board of the BSP; and (2) what is summary in nature
is the power of the Monetary Board of the BSP to forbid or stop a bank or quasi-bank from doing
further business.

Once liquidation proceedings are instituted before the appropriate trial court, and the trial court
assumes jurisdiction over the Petition, then the proceedings take a different character. Spec. Proc.
No. 91-SP-0600 is the liquidation proceedings initiated by the PDIC before the RTC. Liquidation
proceedings have been described in detail in the case of Pacific Banking Corporation Employees’
Organization (PaBCEO) v. Court of Appeals,28 to wit –

[A] liquidation proceeding resembles the proceeding for the settlement of estate of deceased
persons under Rules 73 to 91 of the Rules of Court. The two have a common purpose: the
determination of all the assets and the payment of all the debts and liabilities of the insolvent
corporation or the estate. The Liquidator and the administrator or executor are both charged
with the assets for the benefit of the claimants. In both instances, the liability of the
corporation and the estate is not disputed. The court's concern is with the declaration of
creditors and their rights and the determination of their order of payment

xxxx

A liquidation proceeding is a single proceeding which consists of a number of cases properly

classified as "claims." It is basically a two-phased proceeding. The first phase is concerned
with the approval and disapproval of claims. Upon the approval of the petition seeking the
assistance of the proper court in the liquidation of a closed entity, all money claims against
the bank are required to be filed with the liquidation court. This phase may end with the
declaration by the liquidation court that the claim is not proper or without basis. On the other
hand, it may also end with the liquidation court allowing the claim. In the latter case, the
claim shall be classified whether it is ordinary or preferred, and thereafter included
Liquidator. In either case, the order allowing or disallowing a particular claim is final order,
and may be appealed by the party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan prepared by
the duly appointed liquidator. The distribution plan specifies in detail the total amount
available for distribution to creditors whose claim were earlier allowed. The Order finally
disposes of the issue of how much property is available for disposal. Moreover, it ushers in
the final phase of the liquidation proceeding - payment of all allowed claims in accordance
with the order of legal priority and the approved distribution plan.

xxxx

A liquidation proceeding is commenced by the filing of a single petition by the Solicitor

General with a court of competent jurisdiction entitled, "Petition for Assistance in the
Liquidation of e.g., Pacific Banking Corporation." All claims against the insolvent are
required to be filed with the liquidation court. Although the claims are litigated in the same
proceeding, the treatment is individual. Each claim is heard separately. And the Order issued
relative to a particular claim applies only to said claim, leaving the other claims unaffected,
as each claim is considered separate and distinct from the others. x x x [Emphases
supplied.]

Irrefragably, liquidation proceedings cannot be summary in nature. It requires the holding of hearings
and presentation of evidence of the parties concerned, i.e., creditors who must prove and
substantiate their claims, and the liquidator disputing the same. It also allows for multiple appeals, so
that each creditor may appeal a final order rendered against its claim. Hence, liquidation
proceedings may very well be highly-contested and drawn-out, because, at the end of it all, all
claims against the corporation undergoing litigation must be settled definitively and its assets
properly disposed off.

WHEREFORE, in view of the foregoing, this Court rules as follows –

(a) The instant Petition is GRANTED and the Orders, dated 17 January 2003 and 13 May 2003, of
the RTC, sitting as the Liquidation Court of the closed RBBI, in Spec. Proc. No. 91-SP-0060,
are NULLIFIED and SET ASIDE for having been rendered with grave abuse of discretion;

(b) The PDIC, as liquidator, is ORDERED to submit to the BIR the final tax return of RBBI, in
accordance with the first paragraph of Section 52(C), in connection with Section 54, of the Tax Code
of 1997; and

(c) The RTC is ORDERED to resume the liquidation proceedings in Spec. Proc. No. 91-SP-0060 in
order to determine all the claims of the creditors, including that of the National Government, as
determined and presented by the BIR; and, pursuant to such determination, and guided accordingly
by the provisions of the Civil Code on preference of credit, to review and approve the Project of
Distribution of the assets of RBBI.

SO ORDERED.
G.R. No. 179625               February 24, 2014

NICANORA G. BUCTON (deceased), substituted by REQUILDA B. YRAY, Petitioner,

vs.
RURAL BANK OF EL SALVADOR, INC., MISAMIS ORIENTAL, and REYNALDO
CUYONG, Respondents,
vs.
ERLINDA CONCEPCION AND HER HUSBAND AND AGNES BUCTON LUGOD, Third Party
Defendants.

DECISION

DEL CASTILLO, J.:

A mortgage executed by an authorized agent who signed in his own name without indicating that he
acted for and on behalf of his principal binds only the agent and not the principal.

This Petition for Review on Certiorari  under Rule 45 of the Rules of Court assails the August 17,
1

2005 Decision  and the June 7, 2007 Resolution  of the Court of Appeals (CA) in CA-G.R. CV No.
2 3

60841.

Factual Antecedents

On April 29, 1988, petitioner Nicanora G. Bucton filed with the Regional Trial Court (RTC) of
Cagayan de Oro a case  for Annulment of Mortgage, Foreclosure, and Special Power of Attorney
4

(SPA) against Erlinda Concepcion (Concepcion) and respondents Rural Bank of El Salvador,
Misamis Oriental, and Sheriff Reynaldo Cuyong. 5

Petitioner alleged that she is the owner of a parcel of land, covered by Transfer Certificate of Title
(TCT) No. T-3838, located in Cagayan de Oro City;  that on June 6, 1982, Concepcion borrowed the
6

title on the pretext that she was going to show it to an interested buyer;  that Concepcion obtained a
7

loan in the amount of ₱30,000.00 from respondent bank;  that as security for the loan, Concepcion
8

mortgaged petitioner’s house and lot to respondent bank using a SPA  allegedly executed by
9

petitioner in favor of Concepcion;  that Concepcion failed to pay the loan;  that petitioner’s house
10 11

and lot were foreclosed by respondent sheriff without a Notice of Extra-Judicial Foreclosure or
Notice of Auction Sale;  and that petitioner’s house and lot were sold in an auction sale in favor of
12

respondent bank. 13

Respondent bank filed an Answer  interposing lack of cause of action as a defense.  It denied the
14 15

allegation of petitioner that the SPA was forged  and averred that on June 22, 1987, petitioner went
16
to the bank and promised to settle the loan of Concepcion before September 30, 1987.  As to the 17

alleged irregularities in the foreclosure proceedings, respondent bank asserted that it complied with
the requirements of the law in foreclosing the house and lot.  By way of cross-claim, respondent
18

bank prayed that in the event of an adverse judgment against it, Concepcion, its co-defendant, be
ordered to indemnify it for all damages. 19

However, since summons could not be served upon Concepcion, petitioner moved to drop her as a
defendant,  which the RTC granted in its Order dated October 19, 1990.
20 21

This prompted respondent bank to file a Third-Party Complaint  against spouses Concepcion and
22

Agnes Bucton Lugod (Lugod), the daughter of petitioner. Respondent bank claimed that it would not
have granted the loan and accepted the mortgage were it not for the assurance of Concepcion and
Lugod that the SPA was valid.  Thus, respondent bank prayed that in case it be adjudged liable, it
23

should be reimbursed by third-party defendants. 24

On January 30, 1992, spouses Concepcion were declared in default for failing to file a responsive
pleading. 25

During the trial, petitioner testified that a representative of respondent bank went to her house to
inform her that the loan secured by her house and lot was long overdue.  Since she did not 26

mortgage any of her properties nor did she obtain a loan from respondent bank, she decided to go to
respondent bank on June 22, 1987 to inquire about the matter.  It was only then that she discovered
27

that her house and lot was mortgaged by virtue of a forged SPA.  She insisted that her signature
28

and her husband’s signature on the SPA were forged  and that ever since she got married, she no
29

longer used her maiden name, Nicanora Gabar, in signing documents.  Petitioner also denied 30

appearing before the notary public, who notarized the SPA.  She also testified that the property
31

referred to in the SPA, TCT No. 3838, is a vacant lot and that the house, which was mortgaged and
foreclosed, is covered by a different title, TCT No. 3839. 32

To support her claim of forgery, petitioner presented Emma Nagac who testified that when she was
at Concepcion’s boutique, she was asked by the latter to sign as a witness to the SPA;  that when 33

she signed the SPA, the signatures of petitioner and her husband had already been affixed;  and 34

that Lugod instructed her not to tell petitioner about the SPA. 35

Respondent bank, on the other hand, presented the testimonies of its employees  and respondent 36

sheriff. Based on their testimonies, it appears that on June 8, 1982, Concepcion applied for a loan
for her coconut production business  in the amount of ₱40,000.00 but only the amount of
37

₱30,000.00 was approved;  that she offered as collateral petitioner’s house and lot using the
38

SPA;  and that the proceeds of the loan were released to Concepcion and Lugod on June 11, 1982.
39 40

Edwin Igloria, the bank appraiser, further testified that Concepcion executed a Real Estate
Mortgage  over two properties, one registered in the name of petitioner and the other under the
41

name of a certain Milagros Flores.  He said that he inspected petitioner’s property;  that there were
42 43

several houses in the compound;  and although he was certain that the house offered as collateral
44

was located on the property covered by TCT No. 3838, he could not explain why the house that was
foreclosed is located on a lot covered by another title, not included in the Real Estate Mortgage. 45

Ruling of the Regional Trial Court

On February 23, 1998, the RTC issued a Decision  sustaining the claim of petitioner that the SPA
46

was forged as the signatures appearing on the SPA are different from the genuine signatures
presented by petitioner.  The RTC opined that the respondent bank should have conducted a
47
thorough inquiry on the authenticity of the SPA considering that petitioner’s residence certificate was
not indicated in the acknowledgement of the SPA.  Thus, the RTC decreed:
48

WHEREFORE, the court hereby declares null and void or annuls the following:

1. The special power of attorney which was purportedly executed by [petitioner] x x x;

2. The real estate mortgage x x x

3. The sheriff’s sale of Lot No. 2078-B-1-E, and the certificate of title issued in favor of the
Rural Bank of El Salavador [by] virtue thereof, as well as the sheriff’s sale of the two[-]story
house described in the real estate mortgage.

4. The certificate of title in the name of the Rural Bank of El Salvador if any, issued [by] virtue
of the sheriff’s sale.

The court hereby also orders [respondent] bank to pay [petitioner] attorney’s fees of ₱20,000 and
moral damages of ₱20,000 as well as the costs of the case.

SO ORDERED. 49

On reconsideration,  the RTC in its May 8, 1998 Resolution  rendered judgment on the Third-Party
50 51

Complaint filed by respondent bank, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered under the third-party complaint and against third-party
defendants Erlinda Concepcion and her husband:

To indemnify or reimburse [respondent bank] all sums of money plus interests thereon or damages
that [respondent bank] has in this case been forced to pay, disburse or deliver to [petitioner]
including the costs.

SO ORDERED. 52

Ruling of the Court of Appeals

Dissatisfied, respondent bank elevated the case to the CA arguing that the SPA was not forged  and 53

that being a notarized document, it enjoys the presumption of regularity.  Petitioner, on the other
54

hand, maintained that the signatures were forged  and that she cannot be made liable as both the
55

Promissory Note  and the Real Estate Mortgage, which were dated June 11, 1982, were signed by
56

Concepcion in her own personal capacity. 57

On August 17, 2005, the CA reversed the findings of the RTC. The CA found no cogent reason to
invalidate the SPA, the Real Estate Mortgage, and Foreclosure Sale as it was not convinced that the
SPA was forged. The CA declared that although the Promissory Note and the Real Estate Mortgage
did not indicate that Concepcion was signing for and on behalf of her principal, petitioner is estopped
from denying liability since it was her negligence in handing over her title to Concepcion that caused
the loss.  The CA emphasized that under the Principle of Equitable Estoppel, where one or two
58

innocent persons must suffer a loss, he who by his conduct made the loss possible must bear
it.  Thus:
59
WHEREFORE, the above premises considered, the Decision and the Resolution of the Regional
Trial Court (RTC), 10th Judicial Region, Br. 19 of Cagayan de Oro City in Civil Case No. 88-113 is
hereby REVERSED and SET ASIDE. The Second Amended Complaint of Nicanora Bucton is
DISMISSED. Accordingly, the following are declared VALID:

1. The Special Power of Attorney of Nicanora Gabar in favor of Erlinda Concepcion, dated
June 7, 1982;

2. The Real Estate Mortgage, the foreclosure of the same, and the foreclosure sale to the
Rural Bank of El Salvador, Misamis Oriental; and

3. The certificate of title issued to the Rural Bank of El Salavador, Misamis Oriental as a
consequence of the foreclosure sale.

Costs against [petitioner].

SO ORDERED. 60

Petitioner moved for reconsideration  but the same was denied by the CA in its June 7, 2007
61

Resolution.62

Issues

Hence, this recourse by petitioner raising the following issues:

FIRST

X X X WHETHER X X X THE [CA] WAS RIGHT IN DECLARING THE PETITIONER LIABLE ON

THE LITIGATED LOAN/MORTGAGE WHEN (i) SHE DID NOT EXECUTE EITHER IN PERSON OR
BY ATTORNEY-IN-FACT SUBJECT MORTGAGE; (ii) IT WAS EXECUTED BY CONCEPCION IN
HER PERSONAL CAPACITY AS MORTGAGOR, AND (iii) THE LOAN SECURED BY THE
MORTGAGE WAS CONCEPCION’S EXCLUSIVE LOAN FOR HER OWN COCONUT
PRODUCTION

SECOND

X X X WHETHER X X X UNDER ARTICLE 1878 (NEW CIVIL CODE) THE [CA] WAS RIGHT IN
MAKING PETITIONER A SURETY PRIMARILY ANSWERABLE FOR CONCEPCION’S PERSONAL
LOAN, IN THE ABSENCE OF THE REQUIRED [SPA]

THIRD

WHETHER X X X THE [CA] WAS RIGHT WHEN IT RULED THAT PETITIONER’S

DECLARATIONS ARE SELF-SERVING TO JUSTIFY ITS REVERSAL OF THE TRIAL COURT’S
JUDGMENT, IN THE FACE OF THE RESPONDENTS’ DOCUMENTARY EVIDENCES X X X,
WHICH INCONTROVERTIBLY PROVED THAT PETITIONER HAS ABSOLUTELY NO
PARTICIPATION OR LIABILITY ON THE LITIGATED LOAN/MORTGAGE

FOURTH
WHETHER X X X THE [CA] WAS RIGHT WHEN IT FOUND THAT IT WAS PETITIONER’S
NEGLIGENCE WHICH MADE THE LOSS POSSIBLE, DESPITE [THE FACT] THAT SHE HAS NO
PART IN [THE] SUBJECT LOAN/MORTGAGE, THE BANK’S [FAILURE] TO CONDUCT CAREFUL
EXAMINATION OF APPLICANT’S TITLE AS WELL AS PHYSICAL INVESTIGATION OF THE
LAND OFFERED AS SECURITY, AND TO INQUIRE AND DISCOVER UPON ITS OWN PERIL THE
AGENT’S AUTHORITY, ALSO ITS INORDINATE HASTE IN THE PROCESSING, EVALUATION
AND APPROVAL OF THE LOAN.

FIFTH

WHETHER X X X THE [CA] WAS RIGHT WHEN IT DISREGARDED THE FALSE TESTIMONY OF
THE [RESPONDENT] BANK’S EMPLOYEE, [WHEN HE DECLARED] THAT HE CONDUCTED
ACTUAL INSPECTION OF THE MORTGAGED PROPERTY AND INVESTIGATION WHERE HE
ALLEGEDLY VERIFIED THE QUESTIONED SPA.

SIXTH

WHETHER THE [CA] WAS RIGHT WHEN IT DISREGARDED ESTABLISHED FACTS AND
CIRCUMSTANCES PROVING THAT THE [SPA] IS A FORGED DOCUMENT AND/OR INFECTED
BY INFIRMITIES DIVESTING IT OF THE PRESUMPTION OF REGULARITY CONFERRED BY
LAW ON NOTARIZED DEEDS, AND EVEN IF VALID, THE POWER WAS NOT EXERCISED BY
CONCEPCION. 63

Petitioner’s Arguments

Petitioner maintains that the signatures in the SPA were forged  and that she could not be held
64

liable for the loan as it was obtained by Concepcion in her own personal capacity, not as an
attorney-in-fact of petitioner.  She likewise denies that she was negligent and that her negligence
65

caused the damage.  Instead, she puts the blame on respondent bank as it failed to carefully
66

examine the title and thoroughly inspect the property.  Had it done so, it would have discovered that
67

the house and lot mortgaged by Concepcion are covered by two separate titles.  Petitioner further
68

claims that respondent sheriff failed to show that he complied with the requirements of notice and
publication in foreclosing her house and lot.
69

Respondent bank’s Arguments

Respondent bank, on the other hand, relies on the presumption of regularity of the notarized SPA.  It
70

insists that it was not negligent as it inspected the property before it approved the loan,  unlike
71

petitioner who was negligent in entrusting her title to Concepcion.  As to the foreclosure
72

proceedings, respondent bank contends that under the Rural Bank Act, all loans whose principal is
below ₱100,000.00 are exempt from publication.  Hence, the posting of the Notice of Foreclosure in
73

the places defined by the rules was sufficient.  Besides, respondent sheriff is presumed to have
74

regularly performed his work. 75

Our Ruling

The Petition is meritorious.

The Real Estate Mortgage was entered
into by Concepcion in her own personal
capacity.
As early as the case of Philippine Sugar Estates Development Co. v. Poizat,  we already ruled that
76

"in order to bind the principal by a deed executed by an agent, the deed must upon its face purport
to be made, signed and sealed in the name of the principal."  In other words, the mere fact that the
77

agent was authorized to mortgage the property is not sufficient to bind the principal, unless the deed
was executed and signed by the agent for and on behalf of his principal. This ruling was adhered to
and reiterated with consistency in the cases of Rural Bank of Bombon (Camarines Sur), Inc. v. Court
of Appeals,  Gozun v. Mercado,  and Far East Bank and Trust Company (Now Bank of the
78 79

Philippine Island) v. Cayetano. 80

In Philippine Sugar Estates Development Co., the wife authorized her husband to obtain a loan and
to secure it with mortgage on her property. Unfortunately, although the real estate mortgage stated
that it was executed by the husband in his capacity as attorney-in-fact of his wife, the husband
signed the contract in his own name without indicating that he also signed it as the attorney-in-fact of
his wife.

In Rural Bank of Bombon, the agent contracted a loan from the bank and executed a real estate
mortgage. However, he did not indicate that he was acting on behalf of his principal.

In Gozun, the agent obtained a cash advance but signed the receipt in her name alone, without any
indication that she was acting for and on behalf of her principal.

In Far East Bank and Trust Company, the mother executed an SPA authorizing her daughter to
contract a loan from the bank and to mortgage her properties. The mortgage, however, was signed
by the daughter and her husband as mortgagors in their individual capacities, without stating that the
daughter was executing the mortgage for and on behalf of her mother.

Similarly, in this case, the authorized agent failed to indicate in the mortgage that she was acting for
and on behalf of her principal. The Real Estate Mortgage, explicitly shows on its face, that it was
signed by Concepcion in her own name and in her own personal capacity. In fact, there is nothing in
the document to show that she was acting or signing as an agent of petitioner. Thus, consistent with
the law on agency and established jurisprudence, petitioner cannot be bound by the acts of
Concepcion.

In light of the foregoing, there is no need to delve on the issues of forgery of the SPA and the nullity
of the foreclosure sale. For even if the SPA was valid, the Real Estate Mortgage would still not bind
petitioner as it was signed by Concepcion in her personal capacity and not as an agent of petitioner.
Simply put, the Real Estate Mortgage is void and unenforceable against petitioner.

Respondent bank was negligent.

At this point, we find it significant to mention that respondent bank has no one to blame but
itself.  Not only did it act with undue haste when it granted and released the loan in less than three
1âwphi1

days, it also acted negligently in preparing the Real Estate Mortgage as it failed to indicate that
Concepcion was signing it for and on behalf of petitioner. We need not belabor that the words "as
attorney-in-fact of," "as agent of," or "for and on behalf of," are vital in order for the principal to be
bound by the acts of his agent. Without these words, any mortgage, although signed by the agent,
cannot bind the principal as it is considered to have been signed by the agent in his personal
capacity.

Respondent bank is liable to pay

petitioner attorney’s fees, and the costs
of the suit.
Considering that petitioner was compelled to litigate or to incur expenses to protect her interest,  the
81

RTC was right when it ruled that respondent bank is liable to pay petitioner attorney’s fees in the
amount of ₱20,000.00. However, we are not convinced that petitioner is entitled to an award of
moral damages as it was not satisfactorily shown that respondent bank acted in bad faith or with
malice. Neither was it proven that respondent bank’s acts were the proximate cause of petitioner’s
wounded feelings. On the contrary, we note that petitioner is not entirely free of blame considering
her negligence in entrusting her title to Concepcion. In any case, the RTC did not fully explain why
petitioner is entitled to such award.

Concepcion is liable to pay respondent

bank her unpaid obligation and
reimburse it for all damages, attorney’s
fees and costs of suit.

Concepcion, on the other hand, is liable to pay respondent bank her unpaid obligation under the
Promissory Note dated June 11, 1982, with interest. As we have said, Concepcion signed the
Promissory Note in her own personal capacity; thus, she cannot escape liability. She is also liable to
reimburse respondent bank for all damages, attorneys' fees, and costs the latter is adjudged to pay
petitioner in this case.

WHEREFORE, the Petition is hereby GRANTED. The assailed August 17, 2005 Decision and the
June 7, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 60841 are hereby REVERSED
and SET ASIDE.

The February 23, 1998 Decision of the Regional Trial Court of Cagayan de Oro, Branch 19, in Civil
Case No. 88-113 is hereby REINSTATED, insofar as it (a) annuls the Real Estate Mortgage dated
June 11, 1982, the Sheriffs Sale of petitioner Nicanora Bucton's house and lot and the Transfer
Certificate of Title issued in the name of respondent Rural Bank of El Salvador, Misamis Oriental;
and (b) orders respondent bank to pay petitioner attorney's fees in the amount of ₱20,000.00 and
costs of suit with MODIFICATION that the award of moral damages in the amount of ₱20,000.00 is
deleted for lack of basis.

Likewise, the May 8, 1998 Resolution of the Regional Trial Court of Cagayan de Oro, Branch 19, in
Civil Case No. 88-113 ordering the Third-Party Defendants, Erlinda Concepcion and her husband, to
indemnify or reimburse respondent bank damages, attorneys' fees, and costs the latter is adjudged
to pay petitioner, is hereby REINSTATED.

Finally, Third-Party Defendants, Erlinda Concepcion and her husbahd, are hereby ordered to pay
respondent bank the unpaid obligation under the Promissory Note dated June 11, 1982 with interest.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:
G.R. No. 170785             October 19, 2007

REPUBLIC PLANTERS BANK (now known as MAYBANK PHILIPPINES, INC.) and PHILMAY
PROPERTY, INC., petitioners,
vs.
VIVENCIO T. SARMIENTO, JESUSA N. SARMIENTO, JOSE N. SARMIENTO AND ELIZABETH
B. SARMIENTO, respondents.

DECISION

TINGA, J.:

This is an appeal by certiorari under Rule 45 of the 1997 Rules of Civil Procedure assailing the
Decision1 of the Court of Appeals in CA-G.R. CV No. 74451. The Court of Appeals’ decision affirmed
the decision2 of the Regional Trial Court (RTC) of Parañaque City, Branch 258, which ordered
petitioner Maybank Philippines, Inc. (Maybank) to execute in favor of respondents a deed of
redemption covering two pieces of mortgaged realty and rescinded the deeds of sale executed by
Maybank in favor of petitioner Philmay Property, Inc. (Philmay) and Clara Fabra (Fabra).

As found by the Court of Appeals, the factual antecedents are as follows:

On 13 March 1979, respondents spouses Vivencio and Jesusa Sarmiento, their son, Jose, and the
latter’s spouse, Elizabeth, executed a promissory note, obligating themselves to pay Maybank, then
known as Republic Planters Bank, the amount of P80,000.00 due 360 days after date plus interest at
the rate of 12 percent per annum.3

Earlier, on 9 March 1979, all four respondents executed a Real Estate Mortgage over two parcels of
land covered by OCT No. 5781 and TCT No. 145850 and registered under the names of
respondents Jesusa and Jose, respectively. The mortgage secured the payment of the principal loan
of P80,000.00 and all other obligations, overdrafts and other credit accommodations obtained and
those that may be obtained in the future from Maybank.4

On 8 April 1980, Vivencio for himself and as attorney-in-fact of Jesusa and Jose, executed a
promissory note in which he undertook to pay the amount of P100,000.00 plus 14% interest per
annum on or before April 1981.5 In the same month, all four respondents executed an amendment to
the real estate mortgage changing the consideration of the mortgage from P80,000.00
to P100,000.00 but adopting all the terms and conditions of the previous mortgage as integral parts
of the later one.6
Vivencio was the owner of V. Sarmiento Rattan Furniture, a sole proprietorship engaged in export
business. On various occasions in 1981, he incurred loan obligations from Maybank by way of
export advances. As of 08 September 1982, the debts incurred under the export bills transactions
totaled P1,281,748.03.

On 3 September 1981, Vivencio, Jose and Elizabeth executed a Suretyship Agreement,7 whereby

they agreed to be solidarily liable with V. Sarmiento Rattan Furniture for the payment of P100,000.00
plus all obligations which the latter incurred or would incur from Maybank.

Respondents defaulted in the payment of the export advances, prompting Maybank to institute an
extrajudicial foreclosure of the real estate mortgage on 9 November 1982. At the foreclosure sale,
Maybank was awarded the property for its bid of P254,000.00 and issued a certificate of sale. The
certificate of sale was registered with the Register of Deeds on 04 March 1983.8

Maricel Sarmiento, sister of respondent Jose, purchased a manager’s check from Maybank in the
amount of P300,000.00 on 21 July 1983.9 A week later, respondent Jesusa deposited the amount
of P12,000.00.10 Maybank treated the total amount of P312,000.00 as a deposit and did not grant
respondents’ request for certificate of redemption releasing the foreclosed property. Sometime in
November 1983, Maybank demanded the payment of all outstanding loans under the export bills
transactions. On 3 December 1983, respondents tendered the amount of P302,333.33 in the name
of V. Sarmiento Rattan Furniture.

On 4 July 1990, Maybank consolidated its ownership over the foreclosed property. On 12 November
1997, Maybank and Philmay executed a deed of absolute sale, transferring ownership of the
foreclosed property to the latter. On 15 July 1998, Philmay sold the same to Fabra.

On 3 September 1998, respondents Vivencio and Jose instituted an action for specific performance
against Maybank, Philmay and Fabra. The Complaint,11 docketed as Civil Case No. 98-0323, prayed
for judgment directing Maybank to execute a deed of redemption in favor of respondents and
revoking the subsequent sale of the property to Philmay and Fabra. During the pendency of the trial,
Fabra died and was substituted by Kim Caro as the legal representative of the former’s heirs.

On 8 January 2002, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, viewed in the light of the foregoing, the plaintiffs having been able to
preponderantly prove their case against the defendants, judgment for specific performance is
hereby rendered ordering defendant Maybank to execute in favor of the plaintiffs a Deed of
Redemption covering the two (2) parcels of land formerly embraced in and covered by
Transfer Certificates of Title Nos. 5281 and 145850 of the Register of Deeds of the City of
Parañaque together with all the improvements existing thereon free from all liens and
encumbrances and once accomplished, to immediately deliver the said document to
plaintiffs.

Likewise, the Deed of Sale executed by Republic Planters Bank, now Maybank, in favor of
Philmay Property, Inc., and thereafter, from Philmay Property, Inc. to Clara Fabra, are
hereby revoked and rescinded as well as Certificate of Title No. 139161 registered in the
latter’s name for being null and void.

So also, Phimay Property is hereby directed to reimburse Clara Fabra, now represented by
Kim Caro, the amount of P4,200,000.00[,] representing the purchase price of the property
plus interest thereon at the legal rate computed from the filing of the complaint until fully
paid.
 Defendants are likewise ordered to pay plaintiffs jointly and severally the following, to wit:

1. The amount of P100,000.00 as moral damages;

2. The amount of P50,000.00 as exemplary damages;

3. The amount of P100,000.00 as and by way of attorney’s fees; and

4. The cost of suit.

The counterclaims of the defendants are DISMISSED.

SO ORDERED.12

The RTC based its finding that respondents were able to tender to Maybank within the redemption
period the redemption price of P312,000.00 on the testimony of respondent Jose on and the official
bank receipts evidencing the separate payments totaling said amount made by Maricel Sarmiento
and respondent Jesusa. Upon this finding, the trial court held that Maybank had no justifiable legal
reason to refuse the execution of documents reconveying the titles of the mortgaged property to
respondents. Thus, the trial court concluded that the subsequent transfers of the mortgaged property
to Philmay and then to Fabra were void because Maybank had not acquired any rights thereto in the
first place. The trial court, however, declared Fabra as a purchaser in good faith and, therefore,
entitled to reimbursement of the purchase price.

The RTC rejected Maybank’s defense that the suretyship agreement signed by respondents
Vivencio, Jose and Elizabeth also constituted the mortgaged property as security for the export
advances incurred in the name of V. Sarmiento Rattan Furniture because the real estate mortgage
documents were signed by respondents in their personal capacity, whereas the suretyship
agreement was signed by Vivencio in his capacity as manager of V. Sarmiento Rattan Furniture. The
trial court noted that the suretyship agreement was not even annotated in the titles of the mortgaged
property.

On 12 December 2005, the Court of Appeals rendered the assailed Decision affirming the trial
court’s judgment, particularly the latter’s finding that respondents made a valid tender of the
redemption price and that the export advances in the name of V. Sarmiento Rattan Furniture did not
belong to the species of obligations secured by the real estate mortgage. Furthermore, the appellate
court construed as a contract of adhesion the proviso in the mortgage contract that included "interest
and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the Mortgagee."13 Describing the same
as a "dragnet clause," the appellate court held that it should be carefully scrutinized and strictly
construed.

Only petitioners Maybank and Philmay appealed from the decision of the Court of Appeals. In the
instant petition, they raise the following arguments:

THE TRIAL COURT AND THE COURT OF APPEALS ERRED IN FINDING THAT
PETITIONERS HAVE PROPERLY REDEEMED THE FORECLOSED PROPERTIES.

THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT TREATING

RESPONDENTS’ EXPORT ADVANCES AS SECURED BY THE REAL ESTATE
MORTGAGE AND THUS SHOULD ALSO BE PAID.
 THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT RULING THAT THE
RESPONDENTS’ CLAIM IS ALREADY BARRED BY LACHES.

THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT CONSIDERING AND
FINDING THAT PHILMAY AND DEFENDANT CLARA FABRA ARE BUYERS IN GOOD
FAITH.

THE LOWER COURT AND THE COURT OF APPEALS ERRED IN FINDING THAT
MAYBANK ACTED IN BAD FAITH.

RESPONDENTS ARE NOT ENTITLED TO MORAL AND EXEMPLARY DAMAGES AS

WELL AS ATTORNEY’S FEES.14

In a nutshell, the instant petition raises the issue of whether the deposits made by respondents
constituted a valid tender of the redemption price. Essential to the resolution of this issue is the
determination of the amount of indebtedness that respondents were legally obligated to satisfy in
order to consider the payment thereof as a valid redemption of the foreclosed property.

Maybank argues that respondents’ outstanding obligation amounted to more than P1 million as of
the date of the foreclosure sale. Hence, the tender by respondents of an amount less than that did
not constitute a valid redemption of the foreclosed property. For their part, respondents contend that
the factual finding of both the trial court and the Court of Appeals to the effect that they were able to
make a valid tender of the redemption price, is binding on this Court.

The petition is meritorious.

The crux of the controversy pertains not to the amount of redemption price tendered by respondents
but rather to the sufficiency of the amount tendered that would warrant the redemption of the
foreclosed property. The determination of whether the amount tendered by respondents was enough
to redeem the foreclosed property calls for the ascertainment of the liabilities covered and secured
by the mortgage based on the text of the mortgage deed. Both the trial court and the appellate court
concurred in concluding that the export advances obtained by respondent Vivencio from Maybank
did not belong to the species of obligations secured by the mortgage and that, hence, respondents’
tender of an amount exceeding the principal loan of P100,000.00 was sufficient. Whether or not this
conclusion is correct is a question of law15 that is within the purview of a Rule 45 petition.

The real estate mortgage provides:

xxx

That, for and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the Mortgagee, and to secure the payment of the same and those that
may hereafter be obtained, the principal of all of which is hereby fixed as EIGHTY
THOUSAND ONLY Pesos (P80,000.00), Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary, as
appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the Mortgagee, its successor or assigns, the
parcels of land which are described in the list inserted on the back of this document, and/or
appended hereto; x x x (Emphasis supplied)16
The aforementioned clause is a "blanket mortgage clause." A blanket mortgage clause, also known
as a dragnet clause in American jurisprudence, is one that is specifically phrased to subsume all
debts of past or future origins. Such clauses are carefully scrutinized and strictly construed.
Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of
which may not be known or anticipated at the time, and they avoid the expense and inconvenience
of executing a new security on each new transaction. A dragnet clause operates as a convenience
and accommodation to the borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, etc.17

It is basic in the interpretation and construction of contracts that the literal meaning of the stipulations
shall control if the terms of the contract are clear and leave no doubt on the intention of the
contracting parties.18 It is only when the words appear to contravene the evident intention of the
parties that the latter shall prevail over the former. The real nature of a contract may be determined
from the express terms of the agreement and from the contemporaneous and subsequent acts of the
parties thereto.19

Although at the time of the execution of the real estate mortgage the export advances had not yet
been incurred and the principal obligation was fixed at P80,000.00 and thereafter amended
to P100,000.00, the express tenor of the mortgage contract contemplated the inclusion of future
loans and obligations obtained from Maybank to be secured by the mortgaged property. Nothing in
the mortgage contract would suggest that the parties actually intended to limit the security to only the
principal amount of the loan fixed therein. The stipulations of the mortgage contract being clear,
there is no necessity to ascertain the real intention of the parties. Be that as it may, nothing in the
records would reveal that by the parties’ acts contemporaneous and subsequent to the execution of
the real estate mortgage, they intended to be bound by terms and conditions other than those
provided in the mortgage contract.

The trial court reached the conclusion that the export advances were excluded from the security of
the real estate mortgage based on the theory that respondent Vivencio agreed to be bound as surety
for the payment of the export advances in his capacity as manager of V. Sarmiento Rattan Furniture,
whereas he signed the real estate mortgage in his personal capacity.

This theory is defensible if V. Sarmiento Rattan Furniture were a corporation having a personality
distinct and separate from its corporate officers and Vivencio signed merely as a corporate
representative of V. Sarmiento Rattan Furniture. Even then, a corporate officer may still be held
personally liable for the debts of the corporation if he bound himself to pay the debt of the
corporation under a separate contract of surety or guaranty.

For its part, the Court of Appeals opined that the dragnet clause in the subject real estate mortgage
should be strictly construed and, therefore, the subsequent export advances obtained from Maybank
should not be included in the obligation secured by the mortgage contract.

It is well settled that mortgages given to secure future advancements or loans are valid and legal
contracts, and that the amounts named as consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered.20 A mortgage given to secure advancements
is a continuing security and is not discharged by repayment of the amount named in the mortgage,
until the full amount of the advancements is paid.21

At the time of the foreclosure sale of the mortgaged property, the outstanding obligation arising from
the export bills transactions had already amounted to more than P1 million. In accordance with
Section 78 of the General Banking Act, as amended,22 then governing the foreclosure of the
mortgaged property, redemption may only be made by paying the amount due under the mortgage
deed within one year from the sale of the property. Since respondents failed to satisfy the full
amount of the indebtedness to Maybank, the latter was justified in refusing to grant respondents’
demand for redemption of the foreclosed property.

WHEREFORE, the instant petition for review on certiorari is GRANTED and the Decision of the
Court of Appeals in CA-G.R. CV No. 74451 is hereby REVERSED and SET ASIDE. The complaint
in Civil Case No. 98-0323 before the Regional Trial Court, Branch 258, Parañaque City is
DISMISSED. Costs against respondents.

G.R. No. 176260               November 24, 2010

LUCIA BARRAMEDA VDA. DE BALLESTEROS, Petitioner,

vs.
RURAL BANK OF CANAMAN INC., represented by its Liquidator, the philippine deposit
insurance corporation, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Civil Procedure
assailing the August 15, 2006 Decision1 of the Court of Appeals (CA) in CA-G.R. No. 82711,
modifying the decision of the Regional Trial Court of Iriga City, Branch 36 (RTC-Iriga), in Civil Case
No. IR-3128, by ordering the consolidation of the said civil case with Special Proceeding Case No.
M-5290 (liquidation case) before the Regional Trial Court of Makati City, Branch 59 (RTC-Makati).

It appears from the records that on March 17, 2000, petitioner Lucia Barrameda Vda. De
Ballesteros (Lucia) filed a complaint for Annulment of Deed of Extrajudicial Partition, Deed of
Mortgage and Damages with prayer for Preliminary Injunction against her children, Roy, Rito, Amy,
Arabel, Rico, Abe, Ponce Rex and Adden, all surnamed Ballesteros, and the Rural Bank of
Canaman, Inc., Baao Branch (RBCI) before the RTC-Iriga. The case was docketed as Civil Case
No. IR-3128.

In her complaint, Lucia alleged that her deceased husband, Eugenio, left two (2) parcels of land
located in San Nicolas, Baao, Camarines Sur, each with an area of 357 square meters; that on
March 6, 1995, without her knowledge and consent, her children executed a deed of extrajudicial
partition and waiver of the estate of her husband wherein all the heirs, including Lucia, agreed to
allot the two parcels to Rico Ballesteros (Rico); that, still, without her knowledge and consent, Rico
mortgaged Parcel B of the estate in favor of RBCI which mortgage was being foreclosed for failure to
settle the loan secured by the lot; and that Lucia was occupying Parcel B and had no other place to
live. She prayed that the deed of extrajudicial partition and waiver, and the subsequent mortgage in
favor of RBCI be declared null and void having been executed without her knowledge and consent.
She also prayed for damages.

In its Answer, RBCI claimed that in 1979, Lucia sold one of the two parcels to Rico which
represented her share in the estate of her husband. The extrajudicial partition, waiver and mortgage
were all executed with the knowledge and consent of Lucia although she was not able to sign the
document. RBCI further claimed that Parcel B had already been foreclosed way back in 1999 which
fact was known to Lucia through the auctioning notary public. Attorney’s fees were pleaded as
counterclaim.
The case was then set for pre-trial conference. During the pre-trial, RBCI’s counsel filed a motion to
withdraw after being informed that Philippine Deposit Insurance Corporation (PDIC) would handle
the case as RBCI had already been closed and placed under the receivership of the PDIC.
Consequently, on February 4, 2002, the lawyers of PDIC took over the case of RBCI.

On May 9, 2003, RBCI, through PDIC, filed a motion to dismiss on the ground that the RTC-Iriga has
no jurisdiction over the subject matter of the action. RBCI stated that pursuant to Section 30,
Republic Act No. 7653 (RA No. 7653), otherwise known as the "New Central Bank Act," the RTC-
Makati, already constituted itself, per its Order dated August 10, 2001, as the liquidation court to
assist PDIC in undertaking the liquidation of RBCI. Thus, the subject matter of Civil Case No. IR-
3128 fell within the exclusive jurisdiction of such liquidation court. Lucia opposed the motion.

On July 29, 2003, the RTC-Iriga issued an order2 granting the Motion to Dismiss, to wit:

This resolves the Motion to Dismiss filed by the defendant Rural Bank of Canaman, Inc., premised
on the ground that this court has no jurisdiction over the subject matter of the action. This issue of
jurisdiction was raised in view of the pronouncement of the Supreme Court in Ong v. C.A. 253 SCRA
105 and in the case of Hernandez v. Rural Bank of Lucena, Inc., G.R. No. L-29791 dated January
10, 1978, wherein it was held that "the liquidation court shall have jurisdiction to adjudicate all claims
against the bank whether they be against assets of the insolvent bank, for Specific Performance,
Breach of Contract, Damages or whatever."

It is in view of this jurisprudential pronouncement made by no less than the Supreme Court, that this
case is, as far as defendant Rural Bank of Canaman Inc., is concerned, hereby ordered DISMISSED
without prejudice on the part of the plaintiff to ventilate their claim before the Liquidation Court now,
RTC Branch 59, Makati City.

SO ORDERED.

Not in conformity, Lucia appealed the RTC ruling to the CA on the ground that the RTC-Iriga erred in
dismissing the case because it had jurisdiction over Civil Case No. IR-3128 under the rule on
adherence of jurisdiction.

On August 15, 2006, the CA rendered the questioned decision ordering the consolidation of Civil
Case No. IR-3128 and the liquidation case pending before RTC-Makati. The appellate court
ratiocinated thus:

…The consolidation is desirable in order to prevent confusion, to avoid multiplicity of suits and to
save unnecessary cost and expense. Needless to add, this procedure is well in accord with the
principle that the rules of procedure shall be liberally construed in order to promote their object and
to assist the parties in obtaining just, speedy and inexpensive determination of every action and
proceeding (Vallacar Transit, Inc. v. Yap, 126 SCRA 500 [1983]; Suntay v. Aguiluz, 209 SCRA 500
[1992] citing Ramos v. Ebarle, 182 SCRA 245 [1990]). It would be more in keeping with the
demands of equity if the cases are simply ordered consolidated. Pursuant to Section 2, Rule 1,
Revised Rules of Court, the rules on consolidation should be liberally construed to achieve the
object of the parties in obtaining just, speedy and inexpensive determination of their cases (Allied
Banking Corporation v. Court of Appeals, 259 SCRA 371 [1996]). …

The dispositive portion of the decision reads:

IN VIEW OF ALL THE FOREGOING, the appealed decision is hereby MODIFIED, in such a way
that the dismissal of this case (Civil Case No. IR-3128) is set aside and in lieu thereof another one is
entered ordering the consolidation of said case with the liquidation case docketed as Special
Proceeding No. M-5290 before Branch 59 of the Regional Trial Court of Makati City, entitled "In Re:
Assistance in the Judicial Liquidation of Rural Bank of Canaman, Camarines Sur, Inc., Philippine
Deposit Corporation, Petitioner." No pronouncement as to cost.

SO ORDERED.3

Lucia filed a motion for reconsideration4 but it was denied by the CA in its Resolution dated
December 14, 2006.5

Hence, the present petition for review on certiorari anchored on the following

GROUNDS

(I)

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE REGIONAL TRIAL
COURT OF IRIGA CITY, BRANCH 36 IS VESTED WITH JURISDICTION TO CONTINUE
TRYING AND ULTIMATELY DECIDE CIVIL CASE NO. IR-3128.

(II)

THE COURT OF APPEALS ERRED AND GRAVELY ABUSED ITS DISCRETION IN

ORDERING THE CONSOLIDATION OF CIVIL CASE NO. IR-3128 WITH THE
LIQUIDATION CASE DOCKETED AS SPECIAL PROCEEDINGS NO. M-5290 BEFORE
BRANCH 59 OF THE REGIONAL TRIAL COURT OF MAKATI CITY.6

Given the foregoing arguments, the Court finds that the core issue to be resolved in this petition
involves a determination of whether a liquidation court can take cognizance of a case wherein the
main cause of action is not a simple money claim against a bank ordered closed, placed under
receivership of the PDIC, and undergoing a liquidation proceeding.

Lucia contends that the RTC-Iriga is vested with jurisdiction over Civil Case No. 3128, the
constitution of the liquidation court notwithstanding. According to her, the case was filed before the
RTC-Iriga on March 17, 2000 at the time RBCI was still doing business or before the defendant bank
was placed under receivership of PDIC in January 2001.

She further argues that the consolidation of the two cases is improper. Her case, which is for
annulment of deed of partition and waiver, deed of mortgage and damages, cannot be legally
brought before the RTC-Makati with the liquidation case considering that her cause of action against
RBCI is not a simple claim arising out of a creditor-debtor relationship, but one which involves her
rights and interest over a certain property irregularly acquired by RBCI. Neither is she a creditor of
the bank, as only the creditors of the insolvent bank are allowed to file and ventilate claims before
the liquidator, pursuant to the August 10, 2001 Order of the RTC-Makati which granted the petition
for assistance in the liquidation of RBCI.

In its Comment,7 PDIC, as liquidator of RBCI, counters that the consolidation of Civil Case No. 3128
with the liquidation proceeding is proper. It posits that the liquidation court of RBCI, having been
established, shall have exclusive jurisdiction over all claims against the said bank.
After due consideration, the Court finds the petition devoid of merit.

Lucia’s argument, that the RTC-Iriga is vested with jurisdiction to continue trying Civil Case No. IR-
3128 until its final disposition, evidently falls out from a strained interpretation of the law and
jurisprudence. She contends that:

Since the RTC-Iriga has already obtained jurisdiction over the case it should continue exercising
such jurisdiction until the final termination of the case. The jurisdiction of a court once attached
cannot be ousted by subsequent happenings or events, although of a character which would have
prevented jurisdiction from attaching in the first instance, and the Court retains jurisdiction until it
finally disposes of the case (Aruego Jr. v. Court of Appeals, 254 SCRA 711).

When a court has already obtained and is exercising jurisdiction over a controversy, its jurisdiction to
proceed to final determination of the case is not affected by a new legislation transferring jurisdiction
over such proceedings to another tribunal. (Alindao v. Joson, 264 SCRA 211). Once jurisdiction is
vested, the same is retained up to the end of the litigation (Bernate v. Court of Appeals, 263 SCRA
323).8

The afore-quoted cases, cited by Lucia to bolster the plea for the continuance of her case, find no
application in the case at bench.

Indeed, the Court recognizes the doctrine on adherence of jurisdiction. Lucia, however, must be
reminded that such principle is not without exceptions. It is well to quote the ruling of the CA on this
matter, thus:

This Court is not unmindful nor unaware of the doctrine on the adherence of jurisdiction. However,
the rule on adherence of jurisdiction is not absolute and has exceptions. One of the exceptions is
that when the change in jurisdiction is curative in character (Garcia v. Martinez, 90 SCRA 331
[1979]; Calderon, Sr. v. Court of Appeals, 100 SCRA 459 [1980]; Atlas Fertilizer Corporation v.
Navarro, 149 SCRA 432 [1987]; Abad v. RTC of Manila, Br. Lll, 154 SCRA 664 [1987]).

For sure, Section 30, R.A. 7653 is curative in character when it declared that the liquidation court
shall have jurisdiction in the same proceedings to assist in the adjudication of the disputed claims
against the Bank. The interpretation of this Section (formerly Section 29, R.A. 265) becomes more
obvious in the light of its intent. In Manalo v. Court of Appeals (366 SCRA 752, [2001]), the Supreme
Court says:

xxx The requirement that all claims against the bank be pursued in the liquidation proceedings filed
by the Central Bank is intended to prevent multiplicity of actions against the insolvent bank and
designed to establish due process and orderliness in the liquidation of the bank, to obviate the
proliferation of litigations and to avoid injustice and arbitrariness (citing Ong v. CA, 253 SCRA 105
[1996]). The lawmaking body contemplated that for convenience, only one court, if possible, should
pass upon the claims against the insolvent bank and that the liquidation court should assist the
Superintendents of Banks and regulate his operations (citing Central Bank of the Philippines, et al.
v. CA, et al., 163 SCRA 482 [1988]).9

As regards Lucia’s contention that jurisdiction already attached when Civil Case No. IR-3128 was
filed with, and jurisdiction obtained by, the RTC-Iriga prior to the filing of the liquidation case before
the RTC-Makati, her stance fails to persuade this Court. In refuting this assertion, respondent PDIC
cited the case of Lipana v. Development Bank of Rizal10 where it was held that the time of the filing of
the complaint is immaterial, viz:
It is the contention of petitioners, however, that the placing under receivership of Respondent Bank
long after the filing of the complaint removed it from the doctrine in the said Morfe Case.

This contention is untenable. The time of the filing of the complaint is immaterial. It is the execution
that will obviously prejudice the other depositors and creditors. Moreover, as stated in the said Morfe
case, the effect of the judgment is only to fix the amount of the debt, and not to give priority over
other depositors and creditors.

The cited Morfe case11 held that "after the Monetary Board has declared that a bank is insolvent and
has ordered it to cease operations, the Board becomes the trustee of its assets for the equal benefit
of all the creditors, including depositors. The assets of the insolvent banking institution are held in
trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or
a preference over another by an attachment, execution or otherwise."

Thus, to allow Lucia’s case to proceed independently of the liquidation case, a possibility of
favorable judgment and execution thereof against the assets of RBCI would not only prejudice the
other creditors and depositors but would defeat the very purpose for which a liquidation court was
constituted as well.

Anent the second issue, Lucia faults the CA in directing the consolidation of Civil Case No. IR-3128
with Special Proceedings No. M-5290. The CA committed no error. Lucia’s complaint involving
annulment of deed of mortgage and damages falls within the purview of a disputed claim in
contemplation of Section 30 of R.A. 7653 (The New Central Bank Act). The jurisdiction should be
lodged with the liquidation court. Section 30 provides:

Sec. 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;

(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its
liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or
creditors; or

(d) has wilfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking institution.

For a quasi-bank, any person of recognized competence in banking or finance may be designated
as receiver.

The receiver shall immediately gather and take charge of all the assets and liabilities of the
institution, administer the same for the benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the funds of the institution in non-
speculative investments. The receiver shall determine as soon as possible, but not later than ninety
(90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a
condition that it may be permitted to resume business with safety to its depositors and creditors and
the general public: Provided, That any determination for the resumption of business of the institution
shall be subject to prior approval of the Monetary Board.

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business
in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the
board of directors of its findings and direct the receiver to proceed with the liquidation of the
institution. The receiver shall:

(1) file ex parte with the proper regional trial court, and without requirement of prior notice or
any other action, a petition for assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance Corporation for general
application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted
by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the
receiver after due notice, adjudicate disputed claims against the institution, assist the
enforcement of individual liabilities of the stockholders, directors and officers, and decide on
other issues as may be material to implement the liquidation plan adopted. The receiver shall
pay the cost of the proceedings from the assets of the institution.

(2) convert the assets of the institution to money, dispose of the same to creditors and other
parties, for the purpose of paying the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the Philippines and he may, in
the name of the institution, and with the assistance of counsel as he may retain, institute
such actions as may be necessary to collect and recover accounts and assets of, or defend
any action against, the institution. The assets of an institution under receivership or
liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or liquidation, be exempt from
any order of garnishment, levy, attachment, or execution. [Emphasis supplied]

xxx

"Disputed claims" refers to all claims, whether they be against the assets of the insolvent bank, for
specific performance, breach of contract, damages, or whatever.12 Lucia’s action being a claim
against RBCI can properly be consolidated with the liquidation proceedings before the RTC-Makati.
A liquidation proceeding has been explained in the case of In Re: Petition For Assistance in the
Liquidation of the Rural Bank of BOKOD (Benguet), Inc. v. Bureau of Internal Revenue 13 as follows:

A liquidation proceeding is a single proceeding which consists of a number of cases properly

classified as "claims." It is basically a two-phased proceeding. The first phase is concerned with the
approval and disapproval of claims. Upon the approval of the petition seeking the assistance of the
proper court in the liquidation of a closed entity, all money claims against the bank are required to be
filed with the liquidation court. This phase may end with the declaration by the liquidation court that
the claim is not proper or without basis. On the other hand, it may also end with the liquidation court
allowing the claim. In the latter case, the claim shall be classified whether it is ordinary or preferred,
and thereafter included Liquidator. In either case, the order allowing or disallowing a particular claim
is final order, and may be appealed by the party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan prepared by the duly
appointed liquidator. The distribution plan specifies in detail the total amount available for distribution
to creditors whose claim were earlier allowed. The Order finally disposes of the issue of how much
property is available for disposal. Moreover, it ushers in the final phase of the liquidation proceeding
- payment of all allowed claims in accordance with the order of legal priority and the approved
distribution plan.

xxx

A liquidation proceeding is commenced by the filing of a single petition by the Solicitor General with
a court of competent jurisdiction entitled, "Petition for Assistance in the Liquidation of e.g., Pacific
Banking Corporation." All claims against the insolvent are required to be filed with the liquidation
court. Although the claims are litigated in the same proceeding, the treatment is individual. Each
claim is heard separately. And the Order issued relative to a particular claim applies only to said
claim, leaving the other claims unaffected, as each claim is considered separate and distinct from
the others. x x x [Emphasis supplied.]

It is clear, therefore, that the liquidation court has jurisdiction over all claims, including that of Lucia
against the insolvent bank. As declared in Miranda v. Philippine Deposit Insurance
Corporation,14 regular courts do not have jurisdiction over actions filed by claimants against an
insolvent bank, unless there is a clear showing that the action taken by the BSP, through the
Monetary Board, in the closure of financial institutions was in excess of jurisdiction, or with grave
abuse of discretion. The same is not obtaining in this present case. 1avvphi1

The power and authority of the Monetary Board to close banks and liquidate them thereafter when
public interest so requires is an exercise of the police power of the State. Police power, however, is
subject to judicial inquiry. It may not be exercised arbitrarily or unreasonably and could be set aside
if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or is tantamount to a denial of
due process and equal protection clauses of the Constitution.15

In sum, this Court holds that the consolidation is proper considering that the liquidation court has
jurisdiction over Lucia’s action. It would be more in keeping with law and equity if Lucia’s case is
consolidated with the liquidation case in order to expeditiously determine whether she is entitled to
recover the property subject of mortgage from RBCI and, if so, how much she is entitled to receive
from the remaining assets of the bank.

WHEREFORE, the petition is DENIED.

G.R. No. 206510               September 16, 2014

MOST REV. PEDRO D. ARIGO, Vicar Apostolic of Puerto Princesa D.D.; MOST REV.
DEOGRACIAS S. INIGUEZ, JR., Bishop-Emeritus of Caloocan, FRANCES Q. QUIMPO,
CLEMENTE G. BAUTISTA, JR., Kalikasan-PNE, MARIA CAROLINA P. ARAULLO, RENATO M.
REYES, JR., Bagong Alyansang Makabayan, HON. NERI JAVIER COLMENARES, Bayan Muna
Partylist, ROLAND G. SIMBULAN, PH.D., Junk VF A Movement, TERESITA R. PEREZ, PH.D.,
HON. RAYMOND V. PALATINO, Kabataan Party-list, PETER SJ. GONZALES, Pamalakaya,
GIOVANNI A. TAPANG, PH. D., Agham, ELMER C. LABOG, Kilusang Mayo Uno, JOAN MAY E.
SALVADOR, Gabriela, JOSE ENRIQUE A. AFRICA, THERESA A. CONCEPCION, MARY JOAN
A. GUAN, NESTOR T. BAGUINON, PH.D., A. EDSEL F. TUPAZ, Petitioners,
vs.
SCOTT H. SWIFT in his capacity as Commander of the US. 7th Fleet, MARK A. RICE in his
capacity as Commanding Officer of the USS Guardian, PRESIDENT BENIGNO S. AQUINO III in
his capacity as Commander-in-Chief of the Armed Forces of the Philippines, HON. ALBERT F.
DEL ROSARIO, Secretary, pepartment of Foreign Affair.s, HON. PAQUITO OCHOA, JR.,
Executiv~.:Secretary, Office of the President, . HON. VOLTAIRE T. GAZMIN, Secretary,
Department of National Defense, HON. RAMON JESUS P. P AJE, Secretary, Department of
Environment and Natural Resoz!rces, VICE ADMIRAL JOSE LUIS M. ALANO, Philippine Navy
Flag Officer in Command, Armed Forces of the Philippines, ADMIRAL RODOLFO D. ISO
RENA, Commandant, Philippine Coast Guard, COMMODORE ENRICO EFREN EVANGELISTA,
Philippine Coast Guard Palawan, MAJOR GEN. VIRGILIO 0. DOMINGO, Commandant of
Armed Forces of the Philippines Command and LT. GEN. TERRY G. ROBLING, US Marine
Corps Forces. Pacific and Balikatan 2013 Exercise Co-Director, Respondents.

DECISION

VILLARAMA, JR, J.:

Before us is a petition for the issuance of a Writ of Kalikasan with prayer for the issuance of a
Temporary Environmental Protection Order (TEPO) under Rule 7 of A.M. No. 09-6-8-SC, otherwise
known as the Rules of Procedure for Environmental Cases (Rules), involving violations of
environmental laws and regulations in relation to the grounding of the US military ship USS Guardian
over the Tubbataha Reefs.

Factual Background

The name "Tubbataha" came from the Samal (seafaring people of southern Philippines) language
which means "long reef exposed at low tide." Tubbataha is composed of two huge coral atolls - the
north atoll and the south atoll - and the Jessie Beazley Reef, a smaller coral structure about 20
kilometers north of the atolls. The reefs of Tubbataha and Jessie Beazley are considered part of
Cagayancillo, a remote island municipality of Palawan.1
In 1988, Tubbataha was declared a National Marine Park by virtue of Proclamation No. 306 issued
by President Corazon C. Aquino on August 11, 1988. Located in the middle of Central Sulu Sea, 150
kilometers southeast of Puerto Princesa City, Tubbataha lies at the heart of the Coral Triangle, the
global center of marine biodiversity.

In 1993, Tubbataha was inscribed by the United Nations Educational Scientific and Cultural
Organization (UNESCO) as a World Heritage Site. It was recognized as one of the Philippines'
oldest ecosystems, containing excellent examples of pristine reefs and a high diversity of marine life.
The 97,030-hectare protected marine park is also an important habitat for internationally threatened
and endangered marine species. UNESCO cited Tubbataha's outstanding universal value as an
important and significant natural habitat for in situ conservation of biological diversity; an example
representing significant on-going ecological and biological processes; and an area of exceptional
natural beauty and aesthetic importance. 2

On April 6, 2010, Congress passed Republic Act (R.A.) No. 10067,  otherwise known as the
3

"Tubbataha Reefs Natural Park (TRNP) Act of 2009" "to ensure the protection and conservation of
the globally significant economic, biological, sociocultural, educational and scientific values of the
Tubbataha Reefs into perpetuity for the enjoyment of present and future generations." Under the
"no-take" policy, entry into the waters of TRNP is strictly regulated and many human activities are
prohibited and penalized or fined, including fishing, gathering, destroying and disturbing the
resources within the TRNP. The law likewise created the Tubbataha Protected Area Management
Board (TPAMB) which shall be the sole policy-making and permit-granting body of the TRNP.

The USS Guardian is an Avenger-class mine countermeasures ship of the US Navy. In December
2012, the US Embassy in the Philippines requested diplomatic clearance for the said vessel "to enter
and exit the territorial waters of the Philippines and to arrive at the port of Subic Bay for the purpose
of routine ship replenishment, maintenance, and crew liberty."  On January 6, 2013, the ship left
4

Sasebo, Japan for Subic Bay, arriving on January 13, 2013 after a brief stop for fuel in Okinawa,
Japan. 1âwphi1

On January 15, 2013, the USS Guardian departed Subic Bay for its next port of call in Makassar,
Indonesia. On January 17, 2013 at 2:20 a.m. while transiting the Sulu Sea, the ship ran aground on
the northwest side of South Shoal of the Tubbataha Reefs, about 80 miles east-southeast of
Palawan. No cine was injured in the incident, and there have been no reports of leaking fuel or oil.

On January 20, 2013, U.S. 7th Fleet Commander, Vice Admiral Scott Swift, expressed regret for the
incident in a press statement.  Likewise, US Ambassador to the Philippines Harry K. Thomas, Jr., in
5

a meeting at the Department of Foreign Affairs (DFA) on February 4, "reiterated his regrets over the
grounding incident and assured Foreign Affairs Secretazy Albert F. del Rosario that the United
States will provide appropriate compensation for damage to the reef caused by the ship."  By March
6

30, 2013, the US Navy-led salvage team had finished removing the last piece of the grounded ship
from the coral reef.

On April 1 7, 2013, the above-named petitioners on their behalf and in representation of their
respective sector/organization and others, including minors or generations yet unborn, filed the
present petition agairtst Scott H. Swift in his capacity as Commander of the US 7th Fleet, Mark A.
Rice in his capacity as Commanding Officer of the USS Guardian and Lt. Gen. Terry G. Robling, US
Marine Corps Forces, Pacific and Balikatan 2013 Exercises Co-Director ("US respondents");
President Benigno S. Aquino III in his capacity as Commander-in-Chief of the Armed Forces of the
Philippines (AFP), DF A Secretary Albert F. Del Rosario, Executive Secretary Paquito Ochoa, Jr.,
Secretary Voltaire T. Gazmin (Department of National Defense), Secretary Jesus P. Paje
(Department of Environment and Natural Resources), Vice-Admiral Jose Luis M. Alano (Philippine
Navy Flag Officer in Command, AFP), Admiral Rodolfo D. Isorena (Philippine Coast Guard
Commandant), Commodore Enrico Efren Evangelista (Philippine Coast Guard-Palawan), and Major
General Virgilio 0. Domingo (AFP Commandant), collectively the "Philippine respondents."

The Petition

Petitioners claim that the grounding, salvaging and post-salvaging operations of the USS Guardian
cause and continue to cause environmental damage of such magnitude as to affect the provinces of
Palawan, Antique, Aklan, Guimaras, Iloilo, Negros Occidental, Negros Oriental, Zamboanga del
Norte, Basilan, Sulu, and Tawi-Tawi, which events violate their constitutional rights to a balanced
and healthful ecology. They also seek a directive from this Court for the institution of civil,
administrative and criminal suits for acts committed in violation of environmental laws and
regulations in connection with the grounding incident.

Specifically, petitioners cite the following violations committed by US respondents under R.A. No.
10067: unauthorized entry (Section 19); non-payment of conservation fees (Section 21 ); obstruction
of law enforcement officer (Section 30); damages to the reef (Section 20); and destroying and
disturbing resources (Section 26[g]). Furthermore, petitioners assail certain provisions of the Visiting
Forces Agreement (VFA) which they want this Court to nullify for being unconstitutional.

The numerous reliefs sought in this case are set forth in the final prayer of the petition, to wit:
WHEREFORE, in view of the foregoing, Petitioners respectfully pray that the Honorable Court: 1.
Immediately issue upon the filing of this petition a Temporary Environmental Protection Order
(TEPO) and/or a Writ of Kalikasan, which shall, in particular,

a. Order Respondents and any person acting on their behalf, to cease and desist all
operations over the Guardian grounding incident;

b. Initially demarcating the metes and bounds of the damaged area as well as an additional
buffer zone;

c. Order Respondents to stop all port calls and war games under 'Balikatan' because of the
absence of clear guidelines, duties, and liability schemes for breaches of those duties, and
require Respondents to assume responsibility for prior and future environmental damage in
general, and environmental damage under the Visiting Forces Agreement in particular.

d. Temporarily define and describe allowable activities of ecotourism, diving, recreation, and
limited commercial activities by fisherfolk and indigenous communities near or around the
TRNP but away from the damaged site and an additional buffer zone;

2. After summary hearing, issue a Resolution extending the TEPO until further orders of the
Court;

3. After due proceedings, render a Decision which shall include, without limitation:

a. Order Respondents Secretary of Foreign Affairs, following the dispositive portion of

Nicolas v. Romulo, "to forthwith negotiate with the United States representatives for the
appropriate agreement on [environmental guidelines and environmental accountability] under
Philippine authorities as provided in Art. V[] of the VFA ... "
b. Direct Respondents and appropriate agencies to commence administrative, civil, and
criminal proceedings against erring officers and individuals to the full extent of the law, and
to make such proceedings public;

c. Declare that Philippine authorities may exercise primary and exclusive criminal jurisdiction
over erring U.S. personnel under the circumstances of this case;

d. Require Respondents to pay just and reasonable compensation in the settlement of all
meritorious claims for damages caused to the Tubbataha Reef on terms and conditions no
less severe than those applicable to other States, and damages for personal injury or death,
if such had been the case;

e. Direct Respondents to cooperate in providing for the attendance of witnesses and in the
collection and production of evidence, including seizure and delivery of objects connected
with the offenses related to the grounding of the Guardian;

f. Require the authorities of the Philippines and the United States to notify each other of the
disposition of all cases, wherever heard, related to the grounding of the Guardian;

g. Restrain Respondents from proceeding with any purported restoration, repair, salvage or
post salvage plan or plans, including cleanup plans covering the damaged area of the
Tubbataha Reef absent a just settlement approved by the Honorable Court;

h. Require Respondents to engage in stakeholder and LOU consultations in accordance with

the Local Government Code and R.A. 10067;

i. Require Respondent US officials and their representatives to place a deposit to the TRNP
Trust Fund defined under Section 17 of RA 10067 as a bona .fide gesture towards full
reparations;

j. Direct Respondents to undertake measures to rehabilitate the areas affected by the

grounding of the Guardian in light of Respondents' experience in the Port Royale grounding
in 2009, among other similar grounding incidents;

k. Require Respondents to regularly publish on a quarterly basis and in the name of

transparency and accountability such environmental damage assessment, valuation, and
valuation methods, in all stages of negotiation;

l. Convene a multisectoral technical working group to provide scientific and technical support
to the TPAMB;

m. Order the Department of Foreign Affairs, Department of National Defense, and the
Department of Environment and Natural Resources to review the Visiting Forces Agreement
and the Mutual Defense Treaty to consider whether their provisions allow for the exercise of
erga omnes rights to a balanced and healthful ecology and for damages which follow from
any violation of those rights;

n. Narrowly tailor the provisions of the Visiting Forces Agreement for purposes of protecting
the damaged areas of TRNP;
 o. Declare the grant of immunity found in Article V ("Criminal Jurisdiction") and Article VI of
the Visiting Forces Agreement unconstitutional for violating equal protection and/or for
violating the preemptory norm of nondiscrimination incorporated as part of the law of the land
under Section 2, Article II, of the Philippine Constitution;

p. Allow for continuing discovery measures;

q. Supervise marine wildlife rehabilitation in the Tubbataha Reefs in all other respects; and

4. Provide just and equitable environmental rehabilitation measures and such other reliefs as
are just and equitable under the premises.  (Underscoring supplied.)
7

Since only the Philippine respondents filed their comment  to the petition, petitioners also filed a
8

motion for early resolution and motion to proceed ex parte against the US respondents. 9

Respondents' Consolidated Comment

In their consolidated comment with opposition to the application for a TEPO and ocular inspection
and production orders, respondents assert that: ( 1) the grounds relied upon for the issuance of a
TEPO or writ of Kalikasan have become fait accompli as the salvage operations on the USS
Guardian were already completed; (2) the petition is defective in form and substance; (3) the petition
improperly raises issues involving the VFA between the Republic of the Philippines and the United
States of America; and ( 4) the determination of the extent of responsibility of the US Government as
regards the damage to the Tubbataha Reefs rests exdusively with the executive branch.

The Court's Ruling

As a preliminary matter, there is no dispute on the legal standing of petitioners to file the present
petition.

Locus standi is "a right of appearance in a court of justice on a given question."  Specifically, it is "a
10

party's personal and substantial interest in a case where he has sustained or will sustain direct injury
as a result" of the act being challenged, and "calls for more than just a generalized
grievance."  However, the rule on standing is a procedural matter which this Court has relaxed for
11

non-traditional plaintiffs like ordinary citizens, taxpayers and legislators when the public interest so
requires, such as when the subject matter of the controversy is of transcendental importance, of
overreaching significance to society, or of paramount public interest. 12

In the landmark case of Oposa v. Factoran, Jr.,  we recognized the "public right" of citizens to "a
13

balanced and healthful ecology which, for the first time in our constitutional history, is solemnly
incorporated in the fundamental law." We declared that the right to a balanced and healthful ecology
need not be written in the Constitution for it is assumed, like other civil and polittcal rights
guaranteed in the Bill of Rights, to exist from the inception of mankind and it is an issue of
transcendental importance with intergenerational implications.  Such right carries with it the
1âwphi1

correlative duty to refrain from impairing the environment. 14

On the novel element in the class suit filed by the petitioners minors in Oposa, this Court ruled that
not only do ordinary citizens have legal standing to sue for the enforcement of environmental rights,
they can do so in representation of their own and future generations. Thus:
Petitioners minors assert that they represent their generation as well as generations yet unborn. We
find no difficulty in ruling that they can, for themselves, for others of their generation and for the
succeeding generations, file a class suit. Their personality to sue in behalf of the succeeding
generations can only be based on the concept of intergenerational responsibility insofar as the right
to a balanced and healthful ecology is concerned. Such a right, as hereinafter expounded, considers
the "rhythm and harmony of nature." Nature means the created world in its entirety. Such rhythm
and harmony indispensably include, inter alia, the judicious disposition, utilization, management,
renewal and conservation of the country's forest, mineral, land, waters, fisheries, wildlife, off-shore
areas and other natural resources to the end that their exploration, development and utilization be
equitably accessible to the present a:: well as future generations. Needless to say, every generation
has a responsibility to the next to preserve that rhythm and harmony for the full 1:njoyment of a
balanced and healthful ecology. Put a little differently, the minors' assertion of their right to a sound
environment constitutes, at the same time, the performance of their obligation to ensure the
protection of that right for the generations to come.  (Emphasis supplied.)
15

The liberalization of standing first enunciated in Oposa, insofar as it refers to minors and generations
yet unborn, is now enshrined in the Rules which allows the filing of a citizen suit in environmental
cases. The provision on citizen suits in the Rules "collapses the traditional rule on personal and
direct interest, on the principle that humans are stewards of nature." 16

Having settled the issue of locus standi, we shall address the more fundamental question of whether
this Court has jurisdiction over the US respondents who did not submit any pleading or manifestation
in this case.

The immunity of the State from suit, known also as the doctrine of sovereign immunity or non-
suability of the State,  is expressly provided in Article XVI of the 1987 Constitution which states:
17

Section 3. The State may not be sued without its consent.

In United States of America v. Judge Guinto,  we discussed the principle of state immunity from suit,
18

as follows:

The rule that a state may not be sued without its consent, now · expressed in Article XVI, Section 3,
of the 1987 Constitution, is one of the generally accepted principles of international law that we have
adopted as part of the law of our land under Article II, Section 2. x x x.

Even without such affirmation, we would still be bound by the generally accepted principles of
international law under the doctrine of incorporation. Under this doctrine, as accepted by the majority
of states, such principles are deemed incorporated in the law of every civilized state as a condition
and consequence of its membership in the society of nations. Upon its admission to such society,
the state is automatically obligated to comply with these principles in its relations with other states.

As applied to the local state, the doctrine of state immunity is based on the justification given by
Justice Holmes that ''there can be no legal right against the authority which makes the law on which
the right depends." [Kawanakoa v. Polybank, 205 U.S. 349] There are other practical reasons for the
enforcement of the doctrine. In the case of the foreign state sought to be impleaded in the local
jurisdiction, the added inhibition is expressed in the maxim par in parem, non habet imperium. All
states are sovereign equals and cannot assert jurisdiction over one another. A contrary disposition
would, in the language of a celebrated case, "unduly vex the peace of nations." [De Haber v. Queen
of Portugal, 17 Q. B. 171]
While the doctrine appears to prohibit only suits against the state without its consent, it is also
applicable to complaints filed against officials of the state for acts allegedly performed by them in the
discharge of their duties. The rule is that if the judgment against such officials will require the state
itself to perform an affirmative act to satisfy the same,. such as the appropriation of the amount
needed to pay the damages awarded against them, the suit must be regarded as against the state
itself although it has not been formally impleaded. [Garcia v. Chief of Staff, 16 SCRA 120] In such a
situation, the state may move to dismiss the comp.taint on the ground that it has been filed without
its consent.  (Emphasis supplied.)
19

Under the American Constitution, the doctrine is expressed in the Eleventh Amendment which
reads:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity,
commenced or prosecuted against one of the United States by Citizens of another State, or by
Citizens or Subjects of any Foreign State.

In the case of Minucher v. Court of Appeals,  we further expounded on the immunity of foreign states
20

from the jurisdiction of local courts, as follows:

The precept that a State cannot be sued in the courts of a foreign state is a long-standing rule of
customary international law then closely identified with the personal immunity of a foreign sovereign
from suit and, with the emergence of democratic states, made to attach not just to the person of the
head of state, or his representative, but also distinctly to the state itself in its sovereign capacity. If
the acts giving rise to a suit arc those of a foreign government done by its foreign agent, although
not necessarily a diplomatic personage, but acting in his official capacity, the complaint could be
barred by the immunity of the foreign sovereign from suit without its consent. Suing a representative
of a state is believed to be, in effect, suing the state itself. The proscription is not accorded for the
benefit of an individual but for the State, in whose service he is, under the maxim -par in parem, non
habet imperium -that all states are soverr~ign equals and cannot assert jurisdiction over one
another. The implication, in broad terms, is that if the judgment against an official would rec 1uire the
state itself to perform an affirmative act to satisfy the award, such as the appropriation of the amount
needed to pay the damages decreed against him, the suit must be regarded as being against the
state itself, although it has not been formally impleaded.  (Emphasis supplied.)
21

In the same case we also mentioned that in the case of diplomatic immunity, the privilege is not an
immunity from the observance of the law of the territorial sovereign or from ensuing legal liability; it
is, rather, an immunity from the exercise of territorial jurisdiction.
22

In United States of America v. Judge Guinto,  one of the consolidated cases therein involved a
23

Filipino employed at Clark Air Base who was arrested following a buy-bust operation conducted by
two officers of the US Air Force, and was eventually dismissed from his employment when he was
charged in court for violation of R.A. No. 6425. In a complaint for damages filed by the said
employee against the military officers, the latter moved to dismiss the case on the ground that the
suit was against the US Government which had not given its consent. The RTC denied the motion
but on a petition for certiorari and prohibition filed before this Court, we reversed the RTC and
dismissed the complaint. We held that petitioners US military officers were acting in the exercise of
their official functions when they conducted the buy-bust operation against the complainant and
thereafter testified against him at his trial. It follows that for discharging their duties as agents of the
United States, they cannot be directly impleaded for acts imputable to their principal, which has not
given its consent to be sued.
This traditional rule of State immunity which exempts a State from being sued in the courts of
another State without the former's consent or waiver has evolved into a restrictive doctrine which
distinguishes sovereign and governmental acts (Jure imperil") from private, commercial and
proprietary acts (Jure gestionis). Under the restrictive rule of State immunity, State immunity extends
only to acts Jure imperii. The restrictive application of State immunity is proper only when the
proceedings arise out of commercial transactions of the foreign sovereign, its commercial activities
or economic affairs.24

In Shauf v. Court of Appeals,  we discussed the limitations of the State immunity principle, thus:
25

It is a different matter where the public official is made to account in his capacity as such for acts
contrary to law and injurious to the rights of plaintiff. As was clearly set forth by JustiGe Zaldivar in
Director of the Bureau of Telecommunications, et al. vs. Aligaen, etc., et al. : "Inasmuch as the State
authorizes only legal acts by its officers, unauthorized acts of government officials or officers are not
acts of the State, and an action against the officials or officers by one whose rights have been
invaded or violated by such acts, for the protection of his rights, is not a suit against the State within
the rule of immunity of the State from suit. In the same tenor, it has been said that an action at law or
suit in equity against a State officer or the director of a State department on the ground that, while
claiming to act for the State, he violates or invades the personal and property rights of the plaintiff,
under an unconstitutional act or under an assumption of authority which he does not have, is not a
suit against the State within the constitutional provision that the State may not be sued without its
consent." The rationale for this ruling is that the doctrine of state immunity cannot be used as an
instrument for perpetrating an injustice.

xxxx

The aforecited authorities are clear on the matter. They state that the doctrine of immunity from suit
will not apply and may not be invoked where the public official is being sued in his private and
personal capacity as an ordinary citizen. The cloak of protection afforded the officers and agents of
the government is removed the moment they are sued in their individual capacity. This situation
usually arises where the public official acts without authority or in excess of the powers vested in
him. It is a well-settled principle of law that a public official may be liable in his personal private
capacity for whatever damage he may have caused by his act done with malice and in bad faith, or
beyond the scope of his authority or jurisdiction.  (Emphasis supplied.) In this case, the US
26

respondents were sued in their official capacity as commanding officers of the US Navy who had
control and supervision over the USS Guardian and its crew. The alleged act or omission resulting in
the unfortunate grounding of the USS Guardian on the TRNP was committed while they we:re
performing official military duties. Considering that the satisfaction of a judgment against said
officials will require remedial actions and appropriation of funds by the US government, the suit is
deemed to be one against the US itself. The principle of State immunity therefore bars the exercise
of jurisdiction by this Court over the persons of respondents Swift, Rice and Robling.

During the deliberations, Senior Associate Justice Antonio T. Carpio took the position that the
conduct of the US in this case, when its warship entered a restricted area in violation of R.A. No.
10067 and caused damage to the TRNP reef system, brings the matter within the ambit of Article 31
of the United Nations Convention on the Law of the Sea (UNCLOS). He explained that while
historically, warships enjoy sovereign immunity from suit as extensions of their flag State, Art. 31 of
the UNCLOS creates an exception to this rule in cases where they fail to comply with the rules and
regulations of the coastal State regarding passage through the latter's internal waters and the
territorial sea.
According to Justice Carpio, although the US to date has not ratified the UNCLOS, as a matter of
long-standing policy the US considers itself bound by customary international rules on the "traditional
uses of the oceans" as codified in UNCLOS, as can be gleaned from previous declarations by former
Presidents Reagan and Clinton, and the US judiciary in the case of United States v. Royal
Caribbean Cruise Lines, Ltd. 27

The international law of the sea is generally defined as "a body of treaty rules arid customary norms
governing the uses of the sea, the exploitation of its resources, and the exercise of jurisdiction over
maritime regimes. It is a branch of public international law, regulating the relations of states with
respect to the uses of the oceans."  The UNCLOS is a multilateral treaty which was opened for
28

signature on December 10, 1982 at Montego Bay, Jamaica. It was ratified by the Philippines in 1984
but came into force on November 16, 1994 upon the submission of the 60th ratification.

The UNCLOS is a product of international negotiation that seeks to balance State sovereignty (mare
clausum) and the principle of freedom of the high seas (mare liberum).  The freedom to use the
29

world's marine waters is one of the oldest customary principles of international law.  The UNCLOS
30

gives to the coastal State sovereign rights in varying degrees over the different zones of the sea
which are: 1) internal waters, 2) territorial sea, 3) contiguous zone, 4) exclusive economic zone, and
5) the high seas. It also gives coastal States more or less jurisdiction over foreign vessels depending
on where the vessel is located. 31

Insofar as the internal waters and territorial sea is concerned, the Coastal State exercises
sovereignty, subject to the UNCLOS and other rules of international law. Such sovereignty extends
to the air space over the territorial sea as well as to its bed and subsoil.
32

In the case of warships,  as pointed out by Justice Carpio, they continue to enjoy sovereign
33

immunity subject to the following exceptions:

Article 30
Non-compliance by warships with the laws and regulations of the coastal State

If any warship does not comply with the laws and regulations of the coastal State concerning
passage through the territorial sea and disregards any request for compliance therewith which is
made to it, the coastal State may require it to leave the territorial sea immediately.

Article 31
Responsibility of the flag State for damage caused by a warship

or other government ship operated for non-commercial purposes

The flag State shall bear international responsibility for any loss or damage to the coastal State
resulting from the non-compliance by a warship or other government ship operated for non-
commercial purposes with the laws and regulations of the coastal State concerning passage through
the territorial sea or with the provisions of this Convention or other rules of international law.

Article 32
Immunities of warships and other government ships operated for non-commercial purposes

With such exceptions as are contained in subsection A and in articles 30 and 31, nothing in this
Convention affects the immunities of warships and other government ships operated for non-
commercial purposes. (Emphasis supplied.) A foreign warship's unauthorized entry into our internal
waters with resulting damage to marine resources is one situation in which the above provisions may
apply. But what if the offending warship is a non-party to the UNCLOS, as in this case, the US?

An overwhelming majority - over 80% -- of nation states are now members of UNCLOS, but despite
this the US, the world's leading maritime power, has not ratified it.

While the Reagan administration was instrumental in UNCLOS' negotiation and drafting, the U.S.
delegation ultimately voted against and refrained from signing it due to concerns over deep seabed
mining technology transfer provisions contained in Part XI. In a remarkable, multilateral effort to
induce U.S. membership, the bulk of UNCLOS member states cooperated over the succeeding
decade to revise the objection.able provisions. The revisions satisfied the Clinton administration,
which signed the revised Part XI implementing agreement in 1994. In the fall of 1994, President
Clinton transmitted UNCLOS and the Part XI implementing agreement to the Senate requesting its
advice and consent. Despite consistent support from President Clinton, each of his successors, and
an ideologically diverse array of stakeholders, the Senate has since withheld the consent required
for the President to internationally bind the United States to UNCLOS.

While UNCLOS cleared the Senate Foreign Relations Committee (SFRC) during the 108th and
110th Congresses, its progress continues to be hamstrung by significant pockets of political
ambivalence over U.S. participation in international institutions. Most recently, 111 th Congress
SFRC Chairman Senator John Kerry included "voting out" UNCLOS for full Senate consideration
among his highest priorities. This did not occur, and no Senate action has been taken on UNCLOS
by the 112th Congress. 34

Justice Carpio invited our attention to the policy statement given by President Reagan on March 10,
1983 that the US will "recognize the rights of the other , states in the waters off their coasts, as
reflected in the convention [UNCLOS], so long as the rights and freedom of the United States and
others under international law are recognized by such coastal states", and President Clinton's
reiteration of the US policy "to act in a manner consistent with its [UNCLOS] provisions relating to
traditional uses of the oceans and to encourage other countries to do likewise." Since Article 31
relates to the "traditional uses of the oceans," and "if under its policy, the US 'recognize[s] the rights
of the other states in the waters off their coasts,"' Justice Carpio postulates that "there is more
reason to expect it to recognize the rights of other states in their internal waters, such as the Sulu
Sea in this case."

As to the non-ratification by the US, Justice Carpio emphasizes that "the US' refusal to join the UN
CLOS was centered on its disagreement with UN CLOS' regime of deep seabed mining (Part XI)
which considers the oceans and deep seabed commonly owned by mankind," pointing out that such
"has nothing to do with its [the US'] acceptance of customary international rules on navigation."

It may be mentioned that even the US Navy Judge Advocate General's Corps publicly endorses the
ratification of the UNCLOS, as shown by the following statement posted on its official website:

The Convention is in the national interest of the United States because it establishes stable maritime
zones, including a maximum outer limit for territorial seas; codifies innocent passage, transit
passage, and archipelagic sea lanes passage rights; works against "jurisdictiomtl creep" by
preventing coastal nations from expanding their own maritime zones; and reaffirms sovereign
immunity of warships, auxiliaries anJ government aircraft.

xxxx
Economically, accession to the Convention would support our national interests by enhancing the
ability of the US to assert its sovereign rights over the resources of one of the largest continental
shelves in the world. Further, it is the Law of the Sea Convention that first established the concept of
a maritime Exclusive Economic Zone out to 200 nautical miles, and recognized the rights of coastal
states to conserve and manage the natural resources in this Zone. 35

We fully concur with Justice Carpio's view that non-membership in the UNCLOS does not mean that
the US will disregard the rights of the Philippines as a Coastal State over its internal waters and
territorial sea. We thus expect the US to bear "international responsibility" under Art. 31 in
connection with the USS Guardian grounding which adversely affected the Tubbataha reefs. Indeed,
it is difficult to imagine that our long-time ally and trading partner, which has been actively supporting
the country's efforts to preserve our vital marine resources, would shirk from its obligation to
compensate the damage caused by its warship while transiting our internal waters. Much less can
we comprehend a Government exercising leadership in international affairs, unwilling to comply with
the UNCLOS directive for all nations to cooperate in the global task to protect and preserve the
marine environment as provided in Article 197, viz:

Article 197
Cooperation on a global or regional basis

States shall cooperate on a global basis and, as appropriate, on a regional basis, directly or through
competent international organizations, in formulating and elaborating international rules, standards
and recommended practices and procedures consistent with this Convention, for the protection and
preservation of the marine environment, taking into account characteristic regional features.

In fine, the relevance of UNCLOS provisions to the present controversy is beyond dispute. Although
the said treaty upholds the immunity of warships from the jurisdiction of Coastal States while
navigating the.latter's territorial sea, the flag States shall be required to leave the territorial '::;ea
immediately if they flout the laws and regulations of the Coastal State, and they will be liable for
damages caused by their warships or any other government vessel operated for non-commercial
purposes under Article 31.

Petitioners argue that there is a waiver of immunity from suit found in the VFA. Likewise, they invoke
federal statutes in the US under which agencies of the US have statutorily waived their immunity to
any action. Even under the common law tort claims, petitioners asseverate that the US respondents
are liable for negligence, trespass and nuisance.

We are not persuaded.

The VFA is an agreement which defines the treatment of United States troops and personnel visiting
the Philippines to promote "common security interests" between the US and the Philippines in the
region. It provides for the guidelines to govern such visits of military personnel, and further defines
the rights of the United States and the Philippine government in the matter of criminal jurisdiction,
movement of vessel and aircraft, importation and exportation of equipment, materials and
supplies.  The invocation of US federal tort laws and even common law is thus improper considering
36

that it is the VF A which governs disputes involving US military ships and crew navigating Philippine
waters in pursuance of the objectives of the agreement.

As it is, the waiver of State immunity under the VF A pertains only to criminal jurisdiction and not to
special civil actions such as the present petition for issuance of a writ of Kalikasan. In fact, it can be
inferred from Section 17, Rule 7 of the Rules that a criminal case against a person charged with a
violation of an environmental law is to be filed separately:
SEC. 17. Institution of separate actions.-The filing of a petition for the issuance of the writ of
kalikasan shall not preclude the filing of separate civil, criminal or administrative actions.

In any case, it is our considered view that a ruling on the application or non-application of criminal
jurisdiction provisions of the VF A to US personnel who may be found responsible for the grounding
of the USS Guardian, would be premature and beyond the province of a petition for a writ of
Kalikasan. We also find it unnecessary at this point to determine whether such waiver of State
immunity is indeed absolute. In the same vein, we cannot grant damages which have resulted from
the violation of environmental laws. The Rules allows the recovery of damages, including the
collection of administrative fines under R.A. No. 10067, in a separate civil suit or that deemed
instituted with the criminal action charging the same violation of an environmental law. 37

Section 15, Rule 7 enumerates the reliefs which may be granted in a petition for issuance of a writ of
Kalikasan, to wit:

SEC. 15. Judgment.-Within sixty (60) days from the time the petition is submitted for decision, the
court shall render judgment granting or denying the privilege of the writ of kalikasan.

The reliefs that may be granted under the writ are the following:

(a) Directing respondent to permanently cease and desist from committing acts or neglecting
the performance of a duty in violation of environmental laws resulting in environmental
destruction or damage;

(b) Directing the respondent public official, govemment agency, private person or entity to
protect, preserve, rehabilitate or restore the environment;

(c) Directing the respondent public official, government agency, private person or entity to
monitor strict compliance with the decision and orders of the court;

(d) Directing the respondent public official, government agency, or private person or entity to
make periodic reports on the execution of the final judgment; and

(e) Such other reliefs which relate to the right of the people to a balanced and healthful
ecology or to the protection, preservation, rehabilitation or restoration of the environment,
except the award of damages to individual petitioners. (Emphasis supplied.)

We agree with respondents (Philippine officials) in asserting that this petition has become moot in
the sense that the salvage operation sought to be enjoined or restrained had already been
accomplished when petitioners sought recourse from this Court. But insofar as the directives to
Philippine respondents to protect and rehabilitate the coral reef stn icture and marine habitat
adversely affected by the grounding incident are concerned, petitioners are entitled to these reliefs
notwithstanding the completion of the removal of the USS Guardian from the coral reef. However,
we are mindful of the fact that the US and Philippine governments both expressed readiness to
negotiate and discuss the matter of compensation for the damage caused by the USS Guardian.
The US Embassy has also declared it is closely coordinating with local scientists and experts in
assessing the extent of the damage and appropriate methods of rehabilitation.

Exploring avenues for settlement of environmental cases is not proscribed by the Rules. As can be
gleaned from the following provisions, mediation and settlement are available for the consideration
of the parties, and which dispute resolution methods are encouraged by the court, to wit:
 RULE3

xxxx

SEC. 3. Referral to mediation.-At the start of the pre-trial conference, the court shall inquire from the
parties if they have settled the dispute; otherwise, the court shall immediately refer the parties or
their counsel, if authorized by their clients, to the Philippine Mediation Center (PMC) unit for
purposes of mediation. If not available, the court shall refer the case to the clerk of court or legal
researcher for mediation.

Mediation must be conducted within a non-extendible period of thirty (30) days from receipt of notice
of referral to mediation.

The mediation report must be submitted within ten (10) days from the expiration of the 30-day
period.

SEC. 4. Preliminary conference.-If mediation fails, the court will schedule the continuance of the pre-
trial. Before the scheduled date of continuance, the court may refer the case to the branch clerk of
court for a preliminary conference for the following purposes:

(a) To assist the parties in reaching a settlement;

xxxx

SEC. 5. Pre-trial conference; consent decree.-The judge shall put the parties and their counsels
under oath, and they shall remain under oath in all pre-trial conferences.

The judge shall exert best efforts to persuade the parties to arrive at a settlement of the dispute. The
judge may issue a consent decree approving the agreement between the parties in accordance with
law, morals, public order and public policy to protect the right of the people to a balanced and
healthful ecology.

xxxx

SEC. 10. Efforts to settle.- The court shall endeavor to make the parties to agree to compromise or
settle in accordance with law at any stage of the proceedings before rendition of judgment.
(Underscoring supplied.)

The Court takes judicial notice of a similar incident in 2009 when a guided-missile cruiser, the USS
Port Royal, ran aground about half a mile off the Honolulu Airport Reef Runway and remained stuck
for four days. After spending $6.5 million restoring the coral reef, the US government was reported to
have paid the State of Hawaii $8.5 million in settlement over coral reef damage caused by the
grounding. 38

To underscore that the US government is prepared to pay appropriate compensation for the damage
caused by the USS Guardian grounding, the US Embassy in the Philippines has announced the
formation of a US interdisciplinary scientific team which will "initiate discussions with the Government
of the Philippines to review coral reef rehabilitation options in Tubbataha, based on assessments by
Philippine-based marine scientists." The US team intends to "help assess damage and remediation
options, in coordination with the Tubbataha Management Office, appropriate Philippine government
entities, non-governmental organizations, and scientific experts from Philippine universities." 39
A rehabilitation or restoration program to be implemented at the cost of the violator is also a major
relief that may be obtained under a judgment rendered in a citizens' suit under the Rules, viz:

RULES

SECTION 1. Reliefs in a citizen suit.-If warranted, the court may grant to the plaintiff proper reliefs
which shall include the protection, preservation or rehabilitation of the environment and the payment
of attorney's fees, costs of suit and other litigation expenses. It may also require the violator to
submit a program of rehabilitation or restoration of the environment, the costs of which shall be
borne by the violator, or to contribute to a special trust fund for that purpose subject to the control of
the court.1âwphi1

In the light of the foregoing, the Court defers to the Executive Branch on the matter of compensation
and rehabilitation measures through diplomatic channels. Resolution of these issues impinges on
our relations with another State in the context of common security interests under the VFA. It is
settled that "[t]he conduct of the foreign relations of our government is committed by the Constitution
to the executive and legislative-"the political" --departments of the government, and the propriety of
what may be done in the exercise of this political power is not subject to judicial inquiry or decision."40

On the other hand, we cannot grant the additional reliefs prayed for in the petition to order a review
of the VFA and to nullify certain immunity provisions thereof.

As held in BAYAN (Bagong Alyansang Makabayan) v. Exec. Sec. Zamora,  the VFA was duly
41

concurred in by the Philippine Senate and has been recognized as a treaty by the United States as
attested and certified by the duly authorized representative of the United States government. The VF
A being a valid and binding agreement, the parties are required as a matter of international law to
abide by its terms and provisions.  The present petition under the Rules is not the proper remedy to
42

assail the constitutionality of its provisions. WHEREFORE, the petition for the issuance of the
privilege of the Writ of Kalikasan is hereby DENIED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 175697               March 23, 2011

RURAL BANK OF TOBOSO, INC. (now UCPB Savings Bank), Petitioner,

vs.
JEAN VENIEGAS AGTOTO, Respondent.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 176103

JEAN VENIEGAS AGTOTO, Petitioner,

vs.
RURAL BANK OF TOBOSO, INC. and ANTONIO ARBIS in his capacity as Ex-Officio Provincial
Sheriff of Negros Occidental, Respondents.

DECISION

ABAD, J.:

This case is about the foreclosure of a real estate mortgage for the whole amount of the loan when
the mortgage covered only a part of it.

The Facts and the Case

On August 18, 1981 Jean Veniegas Agtoto (Agtoto) executed a special power of attorney (SPA)
authorizing her husband, Rodney, to secure a loan on her behalf and mortgage a registered land
that she owned.1 Using the SPA, on August 20, 1981 Rodney got a loan of ₱130,500.00 from the
Rural Bank of Toboso, Inc. (the Bank), with the ₱61,068.00 portion secured by a real estate
mortgage on his wife’s land. On the following day, he secured the remaining ₱69,432.00 of the loan
with a chattel mortgage over two service boats and one Yanmar Marine engine.

After paying only ₱14,500.00, Agtoto failed to pay her loan with the Bank. After several unheeded
demands to pay, on August 6, 1990 the Bank extrajudicially foreclosed the mortgage on her land,
pegging her debt at ₱130,500.00 as of December 31, 1989 plus the stipulated interest of 14% per
annum from the date of default until full payment and liquidated damages. After notice and
publication, the sheriff foreclosed the mortgage on the land on September 12, 1990 and sold it at
public auction to the Bank, which made the highest bid of ₱305,000.00 "as of December 31, 1989"
plus stipulated interest of 14% per annum. The sheriff subsequently issued a certificate of sale in the
Bank’s favor.
Later, Agtoto filed a complaint with the Regional Trial Court (RTC) of Bacolod City against the Bank
for the annulment of the sale of her land, damages, and injunction with prayer for the issuance of a
temporary restraining order (TRO).

On July 15, 1996 the RTC rendered a decision, ordering the Bank to pay Agtoto ₱305,000.00, which
was its bid for her land, less the ₱61,068.00 due from her loan. On November 26, 1997 the RTC
issued an order, amending the dispositive portion of its decision to include an award of 6%
interest per annum on the amount of the award, counted from the date of the auction sale on
September 13, 1990 until Agtoto would have been fully paid; her previous payment of ₱14,500.00
could not be deducted from the principal loan, however, since this was charged against the interests,
surcharges, and penalties due on her loan. Agtoto appealed to the Court of Appeals (CA) from the
decision, asserting that the RTC erred in not declaring the foreclosure sale null and void.

On October 27, 2005 the CA affirmed the trial court’s decision with modification in that it awarded to
Agtoto ₱189,497.10 plus 12% interest per annum from January 29, 1992 or the date of judicial
demand until full payment. Both parties brought the case to this Court through a petition for review,
the Bank in G.R. 175697 and Agtoto in G.R. 176103.

The Issues Presented

The case presents the following issues:

1. Whether or not the Bank validly foreclosed on Agtoto’s mortgaged land; and

2. Whether or not the Bank should pay ₱189,497.10 to Agtoto as excess bid proceeds with
12% interest per annum, computed from January 29, 1992, the date of judicial demand, until
the award is fully paid.

The Rulings of the Court

Agtoto contends that the foreclosure sale was void since she did not authorize her husband,
Rodney, to act as her attorney-in-fact for purposes of the foreclosure proceedings. As the appellate
court correctly ruled, however, the powers she vested in Rodney as her attorney-in-fact in
connection with the mortgage of her land included the power to constitute the mortgagee bank as
Rodney’s attorney-in-fact for foreclosure purposes for, otherwise, the grant to him of the power to
enter into a mortgage contract would have been incomplete in the usual course.

Here, moreover, the SPA authorized Rodney to make, sign, execute, and deliver contracts,
documents, agreements and other writings of whatever nature or kind, with any person or persons,
upon such terms and conditions as were acceptable to him as attorney-in-fact.2 The constitution of
the Bank as attorney-in-fact for purposes of extrajudicial foreclosure was a condition that Rodney
accepted and it bound Agtoto as principal, the same being a legitimate exercise of his powers under
the SPA. What is more, even assuming that Rodney exceeded his powers under the SPA, Agtoto
should be deemed to have ratified the same when she herself signed the mortgage document.

The foreclosure sale covering the land was likewise valid, notwithstanding the chattel mortgage that
covered the ₱69,432.00 portion of the loan of ₱130,500.00. The chattel mortgage was a contract
distinct from the real estate mortgage, which latter mortgage covered the separate amount of
₱61,068.00. Thus, the Bank had no right to include in the foreclosure of the land the portion of the
loan separately secured by the chattel mortgage.
The Court finds no reason to deviate from the CA’s ruling that the proceeds of the foreclosure sale
should be applied to satisfy only the debt and related charges that the foreclosed land secured.
Since the Bank collected the entire amount of the loan from the proceeds of the foreclosure sale,
including the portion that was not covered by the real estate mortgage, it must return such to Agtoto,
which amounted to ₱189,497.10 (₱305,000.00 less the ₱115,502.90 portion covered by the real
estate mortgage.)3 lauuphil

Although the Bank insists that no excess amount remained out of the proceeds of its winning bid
after payment of what was due it, it miserably failed to present evidence to substantiate its assertion.
The Court cannot simply ignore the importance of surplus foreclosure sale proceeds because they
stand in the place of the land itself and are constructively, at least, real property that belongs to the
mortgagor.4

Lastly, forbearance of money refers to the obligation of the creditor to desist for a fixed period from
requiring the debtor to repay the debt then due and for which 12% per annum is imposed as interest
rate.5 Since the excess amount that the Bank withheld may be regarded in equity as the equivalent
of a forbearance of money, given that it charged the borrower interest for the same, the Bank should
be made to pay 12% interest on it until fully paid.6 Such interest should, however, be computed only
from the time the CA rendered its decision on October 27, 2005 when it determined with reasonable
certainty the amount of the surplus proceeds the Bank has to return to Agtoto.

WHEREFORE, the Court AFFIRMS the Decision of the Court of Appeals in CA-G.R. CV 59246
dated October 27, 2005 with the MODIFICATION that the 12% interest rate per annum shall be
computed from the date of such CA Decision.

SO ORDERED.
G.R. No. 177050               July 01, 2013

CARLOS LIM, CONSOLACION LIM, EDMUNDO LIM,* CARLITO LIM, SHIRLEY LEODADIA

DIZON,** AND ARLEEN LIM FERNANDEZ, PETITIONERS,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, RESPONDENT.

DECISION

DEL CASTILLO, J.:

"While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor’s failure to
pay his obligation, it is imperative that such right be exercised according to its clear mandate. Each
and every requirement of the law must be complied with, lest, the valid exercise of the right would
end."1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the February 22,
2007 Decision3 of the Court of Appeals (CA) in CA-G.R. CV No. 59275.

Factual Antecedents

On November 24, 1969, petitioners Carlos, Consolacion, and Carlito, all surnamed Lim, obtained a
loan of ₱40,000.00 (Lim Account) from respondent Development Bank of the Philippines (DBP) to
finance their cattle raising business.4 On the same day, they executed a Promissory
Note5 undertaking to pay the annual amortization with an interest rate of 9% per annum and penalty
charge of 11% per annum.

On December 30, 1970, petitioners Carlos, Consolacion, Carlito, and Edmundo, all surnamed Lim;
Shirley Leodadia Dizon, Arleen Lim Fernandez, Juan S. Chua,6 and Trinidad D. Chua7 obtained
another loan from DBP8 in the amount of ₱960,000.00 (Diamond L Ranch Account).9 They also
executed a Promissory Note,10 promising to pay the loan annually from August 22, 1973 until August
22, 1982 with an interest rate of 12% per annum and a penalty charge of 1/3% per month on the
overdue amortization.

To secure the loans, petitioners executed a Mortgage11 in favor of DBP over real properties covered
by the following titles registered in the Registry of Deeds for the Province of South Cotabato:

(a) TCT No. T-6005 x x x in the name of Edmundo Lim;

(b) TCT No. T-6182 x x x in the name of Carlos Lim;

 (c) TCT No. T-7013 x x x in the name of Carlos Lim;

(d) TCT No. T-7012 x x x in the name of Carlos Lim;

(e) TCT No. T-7014 x x x in the name of Edmundo Lim;

(f) TCT No. T-7016 x x x in the name of Carlito Lim;

(g) TCT No. T-28922 x x x in the name of Consolacion Lim;

(h) TCT No. T-29480 x x x in the name of Shirley Leodadia Dizon;

(i) TCT No. T-24654 x x x in the name of Trinidad D. Chua; and

(j) TCT No. T-25018 x x x in the name of Trinidad D. Chua’s deceased husband Juan Chua.12

Due to violent confrontations between government troops and Muslim rebels in Mindanao from 1972
to 1977, petitioners were forced to abandon their cattle ranch.13 As a result, their business collapsed
and they failed to pay the loan amortizations.14

In 1978, petitioners made a partial payment in the amount of ₱902,800.00,15 leaving an outstanding

loan balance of ₱610,498.30, inclusive of charges and unpaid interest, as of September 30, 1978.16

In 1989, petitioners, represented by Edmundo Lim (Edmundo), requested from DBP Statements of
Account for the "Lim Account" and the "Diamond L Ranch Account."17 Quoted below are the
computations in the Statements of Account, as of January 31, 1989 which were stamped with the
words "Errors & Omissions Excepted/Subject to Audit:"
1âwphi1

Diamond L Ranch Account:

Matured [Obligation]:

Principal P 939,973.33

Regular Interest 561,037.14

Advances 34,589.45

Additional Interest 2,590,786.26

Penalty Charges 1,068,147.19

Total claims as of January 31, 1989 P 5,194,533.37 18

Lim Account:
Matured [Obligation]:
 Principal P 40,000.00
Regular Interest 5,046.97
Additional Interest 92,113.56
Penalty Charges 39,915.46
Total claims as of January 31, 1989 P 177,075.99 19

Claiming to have already paid ₱902,800.00, Edmundo requested for an amended statement of
account.20

On May 4, 1990, Edmundo made a follow-up on the request for recomputation of the two
accounts.21 On May 17, 1990, DBP’s General Santos Branch informed Edmundo that the Diamond L
Ranch Account amounted to ₱2,542,285.60 as of May 31, 199022 and that the mortgaged properties
located at San Isidro, Lagao, General Santos City, had been subjected to Operation Land Transfer
under the Comprehensive Agrarian Reform Program (CARP) of the government.23 Edmundo was
also advised to discuss with the Department of Agrarian Reform (DAR) and the Main Office of
DBP24 the matter of the expropriated properties.

Edmundo asked DBP how the mortgaged properties were ceded by DAR to other persons without
their knowledge.25 No reply was made.26

On April 30, 1991, Edmundo again signified petitioners’ intention to settle the Diamond L Ranch
Account.27 Again, no reply was made.28

On February 21, 1992, Edmundo received a Notice of Foreclosure scheduled the following day.29 To
stop the foreclosure, he was advised by the bank’s Chief Legal Counsel to pay an interest covering a
60-days period or the amount of ₱60,000.00 to postpone the foreclosure for 60 days.30 He was also
advised to submit a written proposal for the settlement of the loan accounts.31

In a letter32 dated March 20, 1992, Edmundo proposed the settlement of the accounts through dacion
en pago, with the balance to be paid in equal quarterly payments over five years.

In a reply-letter33 dated May 29, 1992, DBP rejected the proposal and informed Edmundo that unless
the accounts are fully settled as soon as possible, the bank will pursue foreclosure proceedings.

DBP then sent Edmundo the Statements of Account34 as of June 15, 1992 which were stamped with
the words "Errors & Omissions Excepted/Subject to Audit" indicating the following amounts: (1)
Diamond L Ranch: ₱7,210,990.27 and (2) Lim Account: ₱187,494.40.

On June 11, 1992, Edmundo proposed to pay the principal and the regular interest of the loans in 36
equal monthly installments.35

On July 3, 1992, DBP advised Edmundo to coordinate with Branch Head Bonifacio Tamayo, Jr.
(Tamayo).36 Tamayo promised to review the accounts.37

On September 21, 1992, Edmundo received another Notice from the Sheriff that the mortgaged
properties would be auctioned on November 22, 1992.38 Edmundo again paid ₱30,000.00 as
additional interest to postpone the auction.39 But despite payment of ₱30,000.00, the mortgaged
properties were still auctioned with DBP emerging as the highest bidder in the amount of
₱1,086,867.26.40 The auction sale, however, was later withdrawn by DBP for lack of jurisdiction.41

Thereafter, Tamayo informed Edmundo of the bank’s new guidelines for the settlement of
outstanding loan accounts under Board Resolution No. 0290-92.42 Based on these guidelines,
petitioners’ outstanding loan obligation was computed at ₱3,500,000.00 plus.43 Tamayo then
proposed that petitioners pay 10% downpayment and the remaining balance in 36 monthly
installments.44 He also informed Edmundo that the bank would immediately prepare the
Restructuring Agreement upon receipt of the downpayment and that the conditions for the settlement
have been "pre-cleared" with the bank’s Regional Credit Committee.45 Thus, Edmundo wrote a
letter46 on October 30, 1992 manifesting petitioners’ assent to the proposal.

On November 20, 1992, Tamayo informed Edmundo that the proposal was accepted with some
minor adjustments and that an initial payment should be made by November 27, 1992.47

On December 15, 1992, Edmundo paid the downpayment of ₱362,271.7548 and was asked to wait
for the draft Restructuring Agreement.49

However, on March 16, 1993, Edmundo received a letter50 from Tamayo informing him that the
Regional Credit Committee rejected the proposed Restructuring Agreement; that it required
downpayment of 50% of the total obligation; that the remaining balance should be paid within one
year; that the interest rate should be non prime or 18.5%, whichever is higher; and that the proposal
is effective only for 90 days from March 5, 1993 to June 2, 1993.51

Edmundo, in a letter52 dated May 28, 1993, asked for the restoration of their previous
agreement.53 On June 5, 1993, the bank replied,54 viz:

This has reference to your letter dated May 28, 1993, which has connection to your desire to
restructure the Diamond L Ranch/Carlos Lim Accounts.

We wish to clarify that what have been agreed between you and the Branch are not final until [the]
same has been approved by higher authorities of the Bank. We did [tell] you during our discussion
that we will be recommending the restructuring of your accounts with the terms and conditions as
agreed. Unfortunately, our Regional Credit Committee did not agree to the terms and conditions as
recommended, hence, the subject of our letter to you on March 15, 1993.

Please be informed further, that the Branch cannot do otherwise but to comply with the conditions
imposed by the Regional Credit Committee. More so, the time frame given had already lapsed on
June 2, 1993.

Unless we will receive a favorable action on your part soonest, the Branch will be constrained to do
appropriate action to protect the interest of the Bank."55

On July 28, 1993, Edmundo wrote a letter56 of appeal to the Regional Credit Committee.

In a letter57 dated August 16, 1993, Tamayo informed Edmundo that the previous Restructuring
Agreement was reconsidered and approved by the Regional Credit Committee subject to the
following additional conditions, to wit:

1) Submission of Board Resolution and Secretary’s Certificate designating you as authorized

representative in behalf of Diamond L Ranch;
 2) Payment of March 15 and June 15, 1993 amortizations within 30 days from date hereof;
and

3) Submission of SEC registration.

In this connection, please call immediately x x x our Legal Division to guide you for the early
documentation of your approved restructuring.

Likewise, please be reminded that upon failure on your part to sign and perfect the documents and
comply [with] other conditions within (30) days from date of receipt, your approved recommendation
shall be deemed CANCELLED and your deposit of ₱362,271.75 shall be applied to your account.

No compliance was made by Edmundo.58

On September 21, 1993, Edmundo received Notice that the mortgaged properties were scheduled to
be auctioned on that day.59 To stop the auction sale, Edmundo asked for an extension until
November 15, 199360 which was approved subject to additional conditions:

Your request for extension is hereby granted with the conditions that:

1) This will be the last and final extension to be granted your accounts; and

2) That all amortizations due from March 1993 to November 1993 shall be paid including the
additional interest computed at straight 18.5% from date of your receipt of notice of approval,
viz:

xxxx

Failure on your part to comply with these conditions, the Bank will undertake appropriate legal
measures to protect its interest.

Please give this matter your preferential attention.61

On November 8, 1993, Edmundo sent Tamayo a telegram, which reads:

Acknowledge receipt of your Sept. 27 letter. I would like to finalize documentation of restructuring
Diamond L Ranch and Carlos Lim Accounts. However, we would need clarification on amortizations
due on NTFI means [sic]. I will call x x x your Legal Department at DBP Head Office by Nov. 11. Pls.
advise who[m] I should contact. Thank you.62

Receiving no response, Edmundo scheduled a meeting with Tamayo in Manila.63 During their

meeting, Tamayo told Edmundo that he would send the draft of the Restructuring Agreement by
courier on November 15, 1993 to the Main Office of DBP in Makati, and that Diamond L Ranch need
not submit the Board Resolution, the Secretary’s Certificate, and the SEC Registration since it is a
single proprietorship.64

On November 24, 1993 and December 3, 1993, Edmundo sent telegrams to Tamayo asking for the
draft of the Restructuring Agreement.65

On November 29, 1993, the documents were forwarded to the Legal Services Department of DBP in
Makati for the parties’ signatures. At the same time, Edmundo was required to pay the amount of
₱1,300,672.75, plus a daily interest of ₱632.15 starting November 16, 1993 up to the date of actual
payment of the said amount.66

On December 19, 1993, Edmundo received the draft of the Restructuring Agreement.67

In a letter68 dated January 6, 1994, Tamayo informed Edmundo that the bank cancelled the
Restructuring Agreement due to his failure to comply with the conditions within a reasonable time.

On January 10, 1994, DBP sent Edmundo a Final Demand Letter asking that he pay the outstanding
amount of ₱6,404,412.92, as of November 16, 1993, exclusive of interest and penalty charges.69

Edmundo, in a letter70 dated January 18, 1994, explained that his lawyer was not able to review the
agreement due to the Christmas holidays. He also said that his lawyer was requesting clarification
on the following points:

Can the existing obligations of the Mortgagors, if any, be specified in the Restructuring Agreement
already?

Is there a statement showing all the accrued interest and advances that shall first be paid before the
restructuring shall be implemented?

Should Mr. Jun Sarenas Chua and his wife Mrs. Trinidad Chua be required to sign as Mortgagors
considering that Mr. Chua is deceased and the pasture lease which he used to hold has already
expired?71

Edmundo also indicated that he was prepared to pay the first quarterly amortization on March 15,
1994 based on the total obligations of ₱3,260,445.71, as of December 15, 1992, plus interest.72

On January 28, 1994, Edmundo received from the bank a telegram73 which reads:

We refer to your cattle ranch loan carried at our DBP General Santos City Branch.

Please coordinate immediately with our Branch Head not later than 29 January 1994, to forestall the
impending foreclosure action on your account.

Please give the matter your utmost attention.

The bank also answered Edmundo’s queries, viz:

In view of the extended leave of absence of AVP Bonifacio A. Tamayo, Jr. due to the untimely
demise of his father, we regret [that] he cannot personally respond to your letter of January 18,
1994. However, he gave us the instruction to answer your letter on direct to the point basis as
follows:

- Yes to Items No. 1 and 2,

- No longer needed on Item No. 3

AVP Tamayo would like us also to convey to you to hurry up with your move to settle the obligation,
while the foreclosure action is still pending with the legal division. He is afraid you might miss your
last chance to settle the account of your parents.74

Edmundo then asked about the status of the Restructuring Agreement as well as the computation of
the accrued interest and advances75 but the bank could not provide any definite answer.76

On June 8, 1994, the Office of the Clerk of Court and Ex-Officio Provincial Sheriff of the RTC of
General Santos City issued a Notice77 resetting the public auction sale of the mortgaged properties
on July 11, 1994. Said Notice was published for three consecutive weeks in a newspaper of general
circulation in General Santos City.78

On July 11, 1994, the Ex-Officio Sheriff conducted a public auction sale of the mortgaged properties
for the satisfaction of petitioners’ total obligations in the amount of ₱5,902,476.34. DBP was the
highest bidder in the amount of ₱3,310,176.55.79

On July 13, 1994, the Ex-Officio Sheriff issued the Sheriff’s Certificate of Extra-Judicial Sale in favor
of DBP covering 11 parcels of land.80

In a letter81 dated September 16, 1994, DBP informed Edmundo that their right of redemption over
the foreclosed properties would expire on July 28, 1995, to wit:

This is to inform you that your right of redemption over your former property/ies acquired by the Bank
on July 13, 1994, thru Extra-Judicial Foreclosure under Act 3135 will lapse on July 28, 1995.

In view thereof, to entitle you of the maximum condonable amount (Penal Clause, AI on Interest,
PC/Default Charges) allowed by the Bank, we are urging you to exercise your right within six (6)
months from the date of auction sale on or before January 12, 1995.

Further, failure on your part to exercise your redemption right by July 28, 1995 will constrain us to
offer your former property/ies in a public bidding.

Please give this matter your preferential attention. Thank you.82

On July 28, 1995, petitioners filed before the RTC of General Santos City, a Complaint83 against
DBP for Annulment of Foreclosure and Damages with Prayer for Issuance of a Writ of Preliminary
Injunction and/or Temporary Restraining Order. Petitioners alleged that DBP’s acts and omissions
prevented them from fulfilling their obligation; thus, they prayed that they be discharged from their
obligation and that the foreclosure of the mortgaged properties be declared void. They likewise
prayed for actual damages for loss of business opportunities, moral and exemplary damages,
attorney’s fees, and expenses of litigation.84

On same date, the RTC issued a Temporary Restraining Order85 directing DBP to cease and desist
from consolidating the titles over petitioners’ foreclosed properties and from disposing the same.

In an Order86 dated August 18, 1995, the RTC granted the Writ of Preliminary Injunction and directed
petitioners to post a bond in the amount of ₱3,000,000.00.

DBP filed its Answer,87 arguing that petitioners have no cause of action;88 that petitioners failed to pay
their loan obligation;89 that as mandated by Presidential Decree No. 385, initial foreclosure
proceedings were undertaken in 1977 but were aborted because petitioners were able to obtain a
restraining order;90 that on December 18, 1990, DBP revived its application for foreclosure but it was
again held in abeyance upon petitioners’ request;91 that DBP gave petitioners written and verbal
demands as well as sufficient time to settle their obligations;92 and that under Act 3135,93 DBP has
the right to foreclose the properties.94

Ruling of the Regional Trial Court

On December 10, 1996, the RTC rendered a Decision,95 the dispositive portion of which reads:

WHEREFORE, in light of the foregoing, judgment is hereby rendered:

(1) Declaring that the [petitioners] have fully extinguished and discharged their obligation to
the [respondent] Bank;

(2) Declaring the foreclosure of [petitioners’] mortgaged properties, the sale of the properties
under the foreclosure proceedings and the resultant certificate of sale issued by the
foreclosing Sheriff by reason of the foreclosure NULL and VOID;

(3) Ordering the return of the [properties] to [petitioners] free from mortgage liens;

(4) Ordering [respondent] bank to pay [petitioners], actual and compensatory damages of
₱170,325.80;

(5) Temperate damages of ₱50,000.00;

(c) Moral damages of ₱500,000.00;

(d) Exemplary damages of ₱500,000.00;

(e) Attorney’s fees in the amount of ₱100,000.00; and

(f) Expenses of litigation in the amount of ₱20,000.00.

[Respondent] Bank’s counterclaims are hereby DISMISSED.

[Respondent] Bank is likewise ordered to pay the costs of suit.

SO ORDERED.96

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC Decision. Thus:

WHEREFORE, in view of the foregoing, the instant appeal is hereby GRANTED. The assailed
Decision dated 10 December 1996 is hereby REVERSED and SET ASIDE. A new judgment is
hereby rendered. It shall now read as follows:

WHEREFORE, premises considered, judgment is hereby rendered:

Ordering the dismissal of the Complaint in Civil Case No. 5608;

Declaring the extrajudicial foreclosure of [petitioners’] mortgaged properties as valid;

Ordering [petitioners] to pay the [respondent] the amount of Two Million Five Hundred Ninety Two
Thousand Two Hundred Ninety Nine [Pesos] and Seventy-Nine Centavos (₱2,592,299.79) plus
interest and penalties as stipulated in the Promissory Note computed from 11 July 1994 until full
payment; and

Ordering [petitioners] to pay the costs.

SO ORDERED.

SO ORDERED.97

Issues

Hence, the instant recourse by petitioners raising the following issues:

1. Whether x x x respondent’s own wanton, reckless and oppressive acts and omissions in
discharging its reciprocal obligations to petitioners effectively prevented the petitioners from
paying their loan obligations in a proper and suitable manner;

2. Whether x x x as a result of respondent’s said acts and omissions, petitioners’ obligations

should be deemed fully complied with and extinguished in accordance with the principle of
constructive fulfillment;

3. Whether x x x the return by the trial Court of the mortgaged properties to petitioners free
from mortgage liens constitutes unjust enrichment;

4. Whether x x x the low bid price made by the respondent for petitioners’ mortgaged
properties during the foreclosure sale is so gross, shocking to the conscience and inherently
iniquitous as to constitute sufficient ground for setting aside the foreclosure sale;

5. Whether x x x the restructuring agreement reached and perfected between the petitioners
and the respondent novated and extinguished petitioners’ loan obligations to respondent
under the Promissory Notes sued upon; and

6. Whether x x x the respondent should be held liable to pay petitioners actual and
compensatory damages, temperate damages, moral damages, exemplary damages,
attorney’s fees and expenses of litigation.98

Petitioners’ Arguments

Petitioners seek the reinstatement of the RTC Decision which declared their obligation fully
extinguished and the foreclosure proceedings of their mortgaged properties void.

Relying on the Principle of Constructive Fulfillment, petitioners insist that their obligation should be
deemed fulfilled since DBP prevented them from performing their obligation by charging excessive
interest and penalties not stipulated in the Promissory Notes, by failing to promptly provide them with
the correct Statements of Account, and by cancelling the Restructuring Agreement even if they
already paid ₱362,271.75 as downpayment.99 They likewise deny any fault or delay on their part in
finalizing the Restructuring Agreement.100
In addition, petitioners insist that the foreclosure sale is void for lack of personal notice101 and the
inadequacy of the bid price.102 They contend that at the time of the foreclosure, petitioners’ obligation
was not yet due and demandable,103 and that the restructuring agreement novated and extinguished
petitioners’ loan obligation.104

Finally, petitioners claim that DBP acted in bad faith or in a wanton, reckless, or oppressive manner;
hence, they are entitled to actual, temperate, moral and exemplary damages, attorney’s fees, and
expenses of litigation.105

Respondent’s Arguments

DBP, on the other hand, denies acting in bad faith or in a wanton, reckless, or oppressive
manner106 and in charging excessive interest and penalties.107 According to it, the amounts in the
Statements of Account vary because the computations were based on different cut-off dates and
different incentive schemes.108

DBP further argues that the foreclosure sale is valid because gross inadequacy of the bid price as a
ground for the annulment of the sale applies only to judicial foreclosure.109 It likewise maintains that
the Promissory Notes and the Mortgage were not novated by the proposed Restructuring
Agreement.110

As to petitioners’ claim for damages, DBP contends it is without basis because it did not act in bad
faith or in a wanton, reckless, or oppressive manner.111

Our Ruling

The Petition is partly meritorious.

The obligation was not extinguished

or discharged.

The Promissory Notes subject of the instant case became due and demandable as early as 1972
and 1976. The only reason the mortgaged properties were not foreclosed in 1977 was because of
the restraining order from the court. In 1978, petitioners made a partial payment of ₱902,800.00. No
subsequent payments were made. It was only in 1989 that petitioners tried to negotiate the
settlement of their loan obligations. And although DBP could have foreclosed the mortgaged
properties, it instead agreed to restructure the loan. In fact, from 1989 to 1994, DBP gave several
extensions for petitioners to settle their loans, but they never did, thus, prompting DBP to cancel the
Restructuring Agreement.

Petitioners, however, insist that DBP’s cancellation of the Restructuring Agreement justifies the
extinguishment of their loan obligation under the Principle of Constructive Fulfillment found in Article
1186 of the Civil Code.

We do not agree.

As aptly pointed out by the CA, Article 1186 of the Civil Code, which states that "the condition shall
be deemed fulfilled when the obligor voluntarily prevents its fulfillment," does not apply in this
case,112 viz:
Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions, which
applies when the following three (3) requisites concur, viz: (1) The condition is suspensive; (2) The
obligor actually prevents the fulfillment of the condition; and (3) He acts voluntarily. Suspensive
condition is one the happening of which gives rise to the obligation. It will be irrational for any Bank
to provide a suspensive condition in the Promissory Note or the Restructuring Agreement that will
allow the debtor-promissor to be freed from the duty to pay the loan without paying it.113

Besides, petitioners have no one to blame but themselves for the cancellation of the Restructuring
Agreement. It is significant to point out that when the Regional Credit Committee reconsidered
petitioners’ proposal to restructure the loan, it imposed additional conditions. In fact, when DBP’s
General Santos Branch forwarded the Restructuring Agreement to the Legal Services Department of
DBP in Makati, petitioners were required to pay the amount of ₱1,300,672.75, plus a daily interest of
₱632.15 starting November 16, 1993 up to the date of actual payment of the said amount.114 This,
petitioners failed to do. DBP therefore had reason to cancel the Restructuring Agreement.

Moreover, since the Restructuring Agreement was cancelled, it could not have novated or
extinguished petitioners’ loan obligation. And in the absence of a perfected Restructuring
Agreement, there was no impediment for DBP to exercise its right to foreclose the mortgaged
properties.115

The foreclosure sale is not valid.

But while DBP had a right to foreclose the mortgage, we are constrained to nullify the foreclosure
sale due to the bank’s failure to send a notice of foreclosure to petitioners.

We have consistently held that unless the parties stipulate, "personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not necessary"116 because Section 3117 of Act 3135 only
requires the posting of the notice of sale in three public places and the publication of that notice in a
newspaper of general circulation.

In this case, the parties stipulated in paragraph 11 of the Mortgage that:

11. All correspondence relative to this mortgage, including demand letters, summons, subpoenas, or
notification of any judicial or extra-judicial action shall be sent to the Mortgagor at xxx or at the
address that may hereafter be given in writing by the Mortgagor or the Mortgagee;118

However, no notice of the extrajudicial foreclosure was sent by DBP to petitioners about the
foreclosure sale scheduled on July 11, 1994. The letters dated January 28, 1994 and March 11,
1994 advising petitioners to immediately pay their obligation to avoid the impending foreclosure of
their mortgaged properties are not the notices required in paragraph 11 of the Mortgage. The failure
of DBP to comply with their contractual agreement with petitioners, i.e., to send notice, is a breach
sufficient to invalidate the foreclosure sale.

In Metropolitan Bank and Trust Company v. Wong,119 we explained that:

x x x a contract is the law between the parties and, that absent any showing that its provisions are
wholly or in part contrary to law, morals, good customs, public order, or public policy, it shall be
enforced to the letter by the courts. Section 3, Act No. 3135 reads:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of general circulation in the municipality and city.

The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication
of the same in a newspaper of general circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties to the mortgage contract are not precluded from exacting
additional requirements. In this case, petitioner and respondent in entering into a contract of real
estate mortgage, agreed inter alia:

all correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extra-judicial action shall be sent to the MORTGAGOR at 40-42
Aldeguer St. Iloilo City, or at the address that may hereafter be given in writing by the MORTGAGOR
to the MORTGAGEE.

Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which
petitioner might take on the subject property, thus according him the opportunity to safeguard his
rights. When petitioner failed to send the notice of foreclosure sale to respondent, he committed a
contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and
void.120 (Emphasis supplied)

In view of foregoing, the CA erred in finding the foreclosure sale valid.

Penalties and interest rates should

be expressly stipulated in writing.

As to the imposition of additional interest and penalties not stipulated in the Promissory Notes, this
should not be allowed. Article 1956 of the Civil Code specifically states that "no interest shall be due
unless it has been expressly stipulated in writing." Thus, the payment of interest and penalties in
loans is allowed only if the parties agreed to it and reduced their agreement in writing.121

In this case, petitioners never agreed to pay additional interest and penalties. Hence, we agree with
the RTC that these are illegal, and thus, void. Quoted below are the findings of the RTC on the
matter, to wit:

Moreover, in its various statements of account, [respondent] Bank charged [petitioners] for additional
interests and penalties which were not stipulated in the promissory notes.

In the Promissory Note, Exhibit "A," for the principal amount of ₱960,000.00, only the following
interest and penalty charges were stipulated:

(1) interest at the rate of twelve percent (12%) per annum;

(2) penalty charge of one-third percent (1/3%) per month on overdue amortization;

(3) attorney’s fees equivalent to ten percent (10%) of the total indebtedness then unpaid; and

(4) advances and interest thereon at one percent (1%) per month.

[Respondent] bank, however, charged [petitioners] the following items as shown in its Statement of
Account for the period as of 31 January 1989, Exhibit "D:"
 (1) regular interest in the amount of ₱561,037.14;

(2) advances in the amount of ₱34,589.45;

(3) additional interest in the amount of ₱2,590,786.26; and

(4) penalty charges in the amount of ₱1,068,147.19.

The Court finds no basis under the Promissory Note, Exhibit "A," for charging the additional interest
in the amount of ₱2,590,786.26. Moreover, it is incomprehensible how the penalty charge of 1/3%
per month on the overdue amortization could amount to ₱1,086,147.19 while the regular interest,
which was stipulated at the higher rate of 12% per annum, amounted to only ₱561,037.14 or about
half of the amount allegedly due as penalties.

In Exhibit "N," which is the statement of account x x x as of 15 June 1992, [respondent] bank
charged plaintiffs the following items:

(1) regular interest in the amount of ₱561,037.14;

(2) advances in the amount of ₱106,893.93;

(3) additional interest on principal in the amount of ₱1,233,893.79;

(4) additional interest on regular interest in the amount of ₱859,966.83;

(5) additional interest on advances in the amount of ₱27,206.45;

(6) penalty charges on principal in the amount of ₱1,639,331.15;

(7) penalty charges on regular interest in the amount of ₱1,146,622.55;

(8) penalty charges on advances in the amount of ₱40,520.53.

Again, the Court finds no basis in the Promissory Note, Exhibit "A," for the imposition of additional
interest on principal in the amount of ₱1,233,893.79, additional interest on regular interest in the
amount of ₱859,966.83, penalty charges on regular interest in the amount of ₱1,146,622.55 and
penalty charges on advances in the amount of ₱40,520.53.

In the Promissory Note, Exhibit "C," for the principal amount of ₱40,000.00, only the following
charges were stipulated:

(1) interest at the rate of nine percent (9%) per annum;

(2) all unpaid amortization[s] shall bear interest at the rate of eleven percent (11%) per
annum; and,

(3) attorney’s fees equivalent to ten percent (10%) of the total indebtedness then unpaid.

In its statement of account x x x as of 31 January 1989, Exhibit "E," [respondent] bank charged
[petitioners] with the following items:
 (1) regular interest in the amount of ₱5,046.97

(2) additional interest in the amount of ₱92,113.56; and

(3) penalty charges in the amount of ₱39,915.46.

There was nothing in the Promissory Note, Exhibit "C," which authorized the imposition of additional
interest. Again, this Court notes that the additional interest in the amount of ₱92,113.56 is even
larger than the regular interest in the amount of ₱5,046.97. Moreover, based on the Promissory
Note, Exhibit "C," if the 11% interest on unpaid amortization is considered an "additional interest,"
then there is no basis for [respondent] bank to add penalty charges as there is no other provision
providing for this charge. If, on the other hand, the 11% interest on unpaid amortization is considered
the penalty charge, then there is no basis to separately charge plaintiffs additional interest. The
same provision cannot be used to charge plaintiffs both interest and penalties.

In Exhibit "O," which is the statement of account x x x as of 15 June 1992, [respondent] charged
[petitioners] with the following:

(1) regular interest in the amount of ₱4,621.25;

(2) additional interest on principal in the amount of ₱65,303.33;

(3) additional interest on regular interest in the amount of ₱7,544.58;

(4) penalty charges on principal in the amount of ₱47,493.33;

(5) penalty charges on regular interest in the amount of ₱5,486.97;

(6) penalty charges on advances in the amount of ₱40,520.53.

[Respondent] bank failed to show the basis for charging additional interest on principal, additional
interest on regular interest and penalty charges on principal and penalty charges on regular interest
under items (2), (3), (4) and (5) above.

Moreover, [respondent] bank charged [petitioners] twice under the same provisions in the
promissory notes. It categorically admitted that the additional interests and penalty charges
separately being charged [petitioners] referred to the same provision of the Promissory Notes,
Exhibits "A" and "C." Thus, for the Lim Account in the amount of ₱40,000.00, [respondent’s] Mr.
Ancheta stated:

Q:

In Exhibit 14, it is stated that for a principal amount of ₱40,000.00 you imposed an additional interest
in the amount of ₱65,303.33 in addition to the regular interest of ₱7,544.58, can you tell us looking
[at] the mortgage contract and promissory note what is your basis for charging that additional
interest?

A:
The same as that when I answered Exhibit No. 3, which shall cover amortization on the principal and
interest at the above-mentioned rate. All unpaid amortization[s] shall bear interest at the rate of
eleven per centum (11%) per annum.

Q:

You also imposed penalty which is on the principal in the amount of ₱40,000.00 in the amount of
₱47,493.33 in addition to regular interest of ₱5,486.96. Can you point what portion of Exhibit 3 gives
DBP the right to impose such penalty?

A:

The same paragraph as stated.

Q:

Can you please read the portion referring to penalty?

A:

All unpaid amortization shall bear interest at the rate of 11% per annum.

Q:

The additional interest is based on 11% per annum and the penalty is likewise based on the same
rate?

A:

Yes, it is combined (TSN, 28 May 1996, pp. 39-40.)

With respect to the Diamond L. Ranch account in the amount of ₱960,000.00, Mr. Ancheta testified
as follows:

Q:

Going back to Exhibit 14 Statement of Accounts. Out of the principal of ₱939,973.33 you imposed an
additional interest of ₱1,233,893.79 plus ₱859,966.83 plus ₱27,206.45. Can you tell us what is the
basis of the imposition?

A:

As earlier stated, it is only the Promissory Note as well as the Mortgage Contract.

Q:

Please point to us where in the Promissory Note is the specific portion?

A:
In Exhibit 1: "in case of failure to pay in full any amortization when due, a penalty charge of 1/3% per
month on the overdue amortization shall be paid."

Q:

What is the rate?

A:

1/3% per month.

Q:

So, the imposition of the additional interest and the penalty charge is based on the same provision?

A:

Yes (TSN, 28 May 1996, pp. 41-42.)

A perusal of the promissory notes, however, failed to justify [respondent] bank’s computation of both
interest and penalty under the same provision in each of the promissory notes.

[Respondent] bank also admitted that the additional interests and penalties being charged
[petitioners] were not based on the stipulations in the Promissory Notes but were imposed
unilaterally as a matter of its internal banking policies. (TSN, 19 March 1996, pp. 23-24.) This
banking policy, however, has been declared null and void in Philippine National Bank vs. CA, 196
SCRA 536 (1991). The act of [respondent] bank in unilaterally changing the stipulated interest rate is
violative of the principle of mutuality of contracts under 1308 of the Civil Code and contravenes 1956
of the Civil Code. [Respondent] bank completely ignored [petitioners’] "right to assent to an important
modification in their agreement and (negated) the element of mutuality in contracts." (Philippine
National Bank vs. CA, G.R. No. 109563, 9 July 1996; Philippine National Bank vs. CA, 238 SCRA 20
1994). As in the PNB cases, [petitioners] herein never agreed in writing to pay the additional interest,
or the penalties, as fixed by [respondent] bank; hence [respondent] bank’s imposition of additional
interest and penalties is null and void.122 (Emphasis supplied)

Consequently, this case should be remanded to the RTC for the proper determination of petitioners’
total loan obligation based on the interest and penalties stipulated in the Promissory Notes.

DBP did not act in bad faith or in a

wanton, reckless, or oppressive manner.

Finally, as to petitioners’ claim for damages, we find the same devoid of merit.

DBP did not act in bad faith or in a wanton, reckless, or oppressive manner in cancelling the
Restructuring Agreement. As we have said, DBP had reason to cancel the Restructuring Agreement
because petitioners failed to pay the amount required by it when it reconsidered petitioners’ request
to restructure the loan.

Likewise, DBP’s failure to send a notice of the foreclosure sale to petitioners and its imposition of
additional interest and penalties do not constitute bad faith. There is no showing that these
contractual breaches were done in bad faith or in a wanton, reckless, or oppressive manner. 1âwphi1
In Philippine National Bank v. Spouses Rocamora,123 we said that:

Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if
the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.

We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of
its contractual obligations, simply because it increased the interest rates and delayed the foreclosure
of the mortgages. Bad faith cannot be imputed simply because the defendant acted with bad
judgment or with attendant negligence. Bad faith is more than these; it pertains to a dishonest
purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty
attributable to a motive, interest or ill will that partakes of the nature of fraud. Proof of actions of this
character is undisputably lacking in this case. Consequently, we do not find the spouses Rocamora
entitled to an award of moral and exemplary damages. Under these circumstances, neither should
they recover attorney’s fees and litigation expense. These awards are accordingly
deleted.124 (Emphasis supplied)

WHEREFORE, the Petition is PARTLY GRANTED. The assailed February 22, 2007 Decision of the
Court of Appeals in CA-G.R. CV No. 59275 is hereby MODIFIED in accordance with this Decision.
The case is hereby REMANDED to the Regional Trial Court of General Santos City, Branch 22, for
the proper determination of petitioners’ total loan obligations based on the interest and penalties
stipulated in the Promissory Notes dated November 24, 1969 and December 30, 1970. The
foreclosure sale of the mortgaged properties held on July 11, 1994 is DECLARED void ab initio for
failure to comply with paragraph 11 of the Mortgage, without prejudice to the conduct of another
foreclosure sale based on the recomputed amount of the loan obligations, if necessary.

SO ORDERED.
G.R. No. 206528

PHILIPPINE ASSET GROWTH TWO, INC. (Successor-In-Interest of Planters Development

Bank) and PLANTERS DEVELOPMENT BANK, Petitioners,
vs.
FASTECH SYNERGY PHILIPPINES, INC. (Formerly First Asia System Technology, Inc.),
FASTECH MICROASSEMBLY & TEST, INC., FASTECH ELECTRONIQUE, INC., and FASTECH
PROPERTIES, INC., Respondents.

DECISION

PERLAS-BERNABE, J.:

For the Court's resolution is a petition for review on certiorari assailing the Decision  dated
1 2

September 28, 2012 and the Resolution  dated March 5, 2013 of the Court of Appeals (CA) in CA-
3

G.R. SP No. 122836 which: (a) approved the Rehabilitation Plan  of respondents Fastech Synergy
4

Philippines, Inc. (formerly First Asia System Technology, Inc.) (Fastech Synergy),
Fastech .Microassembly & Test, Inc. (Fastech Microassembly), F astech Electronique, Inc. (F astech
Electronique ), and F astech Properties, Inc. (Fastech Properties; collectively,
respondents); (b) enjoined petitioner Planters Development Bank (PDB) from effecting the
foreclosure of respondents'" properties during the implementation thereof; and (c) remanded the
case to the Regional Trial Court (RTC) of Makati City, Branch 149 (RTC Makati) to supervise its
implementation.

The Facts

On April 8, 2011, respondents filed a verified Joint Petitions  for corporate rehabilitation
5

(rehabilitation petition) before the RTC-Makati, with prayer for the issuance of a Stay or Suspension
Order,  docketed as SP Case No. M-7130. They claimed that: (a) their business operations and daily
6

affairs are being managed by the same individuals;  (b) they share a majority of their common
7

assets;  and (c) they have common creditors and common liabilities.
8 9

Among the common creditors listed in the rehabilitation petition was PDB,  which had earlier filed a
10

petition   for extra judicial foreclosure of mortgage over the two (2) parcels of land, covered by
11

Transfer Certificate of Title (TCT) Nos. T-458102  and T-458103   and registered in the name of
12 13
Fastech Properties (subject properties),   listed as common assets of respondents in the
14

rehabilitation petition.   The foreclosure sale was held on April 13, 2011, with PDB emerging as the
15

highest bidder.   Respondents claimed that this situation has impacted on their chance to recover
16

from the losses they have suffered over the years, since the said properties are being used by
Fastech Microassembly and Fastech Electronique  in their business operations, and a source of
17

significant revenue for their owner-lessor, Fastech Properties.   Hence, respondents submitted for
18

the court's approval their proposed Rehabilitation Plan,   which sought: (a) a waiver of all accrued
19

interests and penalties; (b) a grace period of two (2) years to pay the principal amount of
respondents' outstanding loans, with the interests accruing during the said period capitalized as part
of the principal, to be paid over a twelve (12)-year period after the grace period; and (c) an interest
rate of four percent (4%) and two percent (2%) per annum (p.a.) for creditors whose credits are
secured by real estate and chattel mortgages, respectively.  20

On April 19, 2011, the RTC-Makati issued a Commencement Order with Stay Order,  and appointed 21

Atty. Rosario S. Bernaldo as Rehabilitation Receiver, which the latter subsequently accepted. 22

After the initial hearing on May 18, 2011, and the filing of the comments/oppositions on the
rehabilitation petition,  the RTC-Makati gave due course to the said petition, and, thereafter, referred
23

the same to the court-appointed Rehabilitation Receiver, who submitted in due time her preliminary
report,   opining that respondents may be rehabilitated, considering that their assets appear to be
24

sufficient to cover their liabilities, but reserved her comment to the Rehabilitation Plan's underlying
assumptions, financial goals, and procedures to accomplish said goals after the submission of a
revised rehabilitation plan as directed by the RTC-Makati,   which respondents subsequently
25

complied.  26

After the creditors had filed their respective comments and/or oppositions to the revised
Rehabilitation Plan, and respondents had submitted their consolidated reply  thereto, the court-
27

appointed Rehabilitation Receiver submitted her comments,  opining that respondents may be
28

successfully rehabilitated, considering the sufficiency of their assets to cover their liabilities and the
underlying assumptions, financial projections and procedures to accomplish said goals in their
Rehabilitation Plan. 29

The RTC-Makati Ruling

In a Resolution  dated December 9, 2011, the RTC-Makati dismissed the rehabilitation petition
30

despite the favorable recommendation of its appointed Rehabilitation Receiver. It found the facts and
figures submitted by respondents to be unreliable in view of the disclaimer of opinion of the
independent auditors who reviewed respondents' 2009 financial statements,   which it considered as
31

amounting to a "straightforward unqualified adverse opinion."  In the same vein, it did not give
32

credence to the unaudited 2010 financial statements as the same were mere photocopied
documents and unsigned by any of respondents' responsible officers.  It also observed that
33

respondents added new accounts and/or deleted/omitted certain accounts.  Furthermore, it rejected
34

the revised financial projections as the bases for which were not submitted for its evaluation on the
ground of confidentiality.  35

Aggrieved, respondents appealed  to the CA, with prayer for the issuance of a temporary restraining
36

order (TRO) and/or a writ of preliminary injunction (WPI), docketed as CA-G.R. SP No. 122836.

The Proceedings Before the CA

In a Resolution dated January 24, 2012, the CA issued a TRO  so as not to render moot and
37

academic the case before it in view of PDB 's pending Ex-Parte Petition for Issuance of a Writ of
Possession over the subject properties before the RTC of Biñan, Laguna, docketed as LRC Case
No. B-5141.  Thereafter, the CA issued a WPI  on March 22, 2012.
38 39

On April 30, 2012, the court-appointed Rehabilitation Receiver submitted a manifestation  before the
40

CA, maintaining that the rehabilitation of respondents is viable since the financial projections and
procedures set forth to accomplish the goals in their Rehabilitation Plan are attainable. 41

After the creditors and respondents had filed their respective comments and reply to the
manifestation, the CA rendered a Decision   dated September 28, 2012 (September 28, 2012
42

Decision), reversing and setting aside the RTC-Makati ruling.  It ruled that the RTC-Makati
43

grievously erred in disregarding the report/opinion of the Rehabilitation Receiver that respondents
may be successfully rehabilitated, despite being highly qualified to make an opinion on accounting in
relation to rehabilitation matters.  It likewise observed that the RTC-Makati failed to distinguish the
44

difference between an adverse or negative opinion and a disclaimer or when an auditor cannot
formulate an opinion with exactitude for lack of sufficient data.  Finally, the CA declared that the
45

Rehabilitation Plan is feasible and should be approved, finding that respondents would be able to
meet their obligations to their creditors within their operating cash profits and other assets without
disrupting their business operations, which will be beneficial to their creditors, employees,
stockholders, and the economy. 46

Accordingly, the CA reinstated the rehabilitation petition, approved respondents' Rehabilitation Plan,
and remanded the case to the RTC-Makati to supervise its implementation.  Considering that
1âwphi1

respondents' creditors are placed in equal footing as a necessary consequence, it permanently

enjoined PDB from "effecting the foreclosure" of the subject properties during the implementation of
the Rehabilitation Plan.47

Dissatisfied, PDB filed a motion for reconsideration  which was, however, denied in a
48

Resolution  dated March 5, 2013 (March 5, 2013 Resolution).

49

In the interim, DivinaLaw entered  its appearance as the new lead counsel of PDB, in
50

collaboration  and with the conformity of its counsel of record, Janda Asia & Associates.  On April 3,
51 52

2013, DivinaLaw, on behalf of petitioner Philippine Asset Growth Two, Inc. (P AGTI), filed a Motion
for Substitution of Parties (motion for substitution),  averring that PAGTI had acquired PDB 's claims
53

and interests in the instant case, hence, should be substituted as a party therein.

The Proceedings Before the Court

On April 18, 2013, PAGTI and PDB (petitioners), represented by DivinaLaw, filed the instant petition,
claiming that PDB received a copy of the March 5, 2013 Resolution on April 3, 2013. 54

On July 10, 2013, respondents filed their Urgent Motion to Dismiss Petition for Review
on Certiorari for Being Filed Out of Time  (urgent motion), positing that contrary to petitioners' claim
55

that PDB received notice of the March 5, 2013 Resolution on April 3, 2013, its counsel, Janda Asia &
Associates, already received a copy of the said resolution on March 12, 2013. Thus, petitioners only
had until March 27, 2013 to file a petition for review on certiorari before the Court, and the petition
filed on April 18, 2013 was filed out oftime. 56

Meanwhile, the Court required respondents to file their comment  to the petition, and subsequently
57

directed petitioners to submit their comment on respondents' urgent motion, and reply to the latter's
comment. 58
In their Comment,  respondents prayed for the dismissal of the petition and reiterated their stand
59

that the same was filed out of time, arguing that the receipt of the March 5, 2013 Resolution on
March 12, 2013 by Janda Asia & Associates, which remained as collaborating counsel of PDB, binds
petitioners and started the running of the fifteen (15)-day period within which to file a petition for
review on certiorari before the Court. Thus, the petition filed on April 18, 2013 was filed beyond the
reglementary period.   Respondents likewise maintained the viability of the rehabilitation plan, which
60

will benefit not only their employees, but their stockholders, creditors, and the general public. 61

For their part, petitioners contended  that: (a) the date of receipt of petitioners' lead
62

counsel, i.e., DivinaLaw's receipt of the March 5, 2013 Resolution, should be the reckoning point of
the fifteen (15)-day period within which to file the instant petition, since only the lead counsel is
entitled to service of court processes,  citing the case of Home Guaranty Corporation v. R-II
63

Builders,Inc.;  and (b) the CA erred in not upholding the dismissal of the rehabilitation petition
64

despite the insufficiency of the Rehabilitation Plan which was based on financial statements that
contained misleading statements, and financial projections that are mere unfounded assumptions/
speculations.  65

Thereafter, respondents filed a Manifestation and Update (Re: Compliance to [the CA] Decision
dated September 28, 2012)66 before the Court, stating that it had achieved the
EBITDA   requirement of the Rehabilitation Plan and made quarterly payments in favor of the bank
67

and non-bank creditors from December 28, 2014 to September 28, 2015, totalling ₱27,l
19,481.79.  However, the amount of ₱8,364,836.53 in favor of PDB was not accepted, and is being
68

held by respondents. 69

The IssuesBefore the Court

The essential issues for the Court's resolution are: (a) whether or not the petition for review
on certiorari was timely filed; and (b) the Rehabilitation Plan is feasible.

The Court's Ruling

I.

The Court first resolves the procedural issue anent the timeliness of the petition's filing.

It is a long-standing doctrine that where a party is represented by several counsels, notice to one is
sufficient, and binds the said party.   Notice to any one of the several counsels on record is
70

equivalent to notice to all, and such notice starts the running of the period to appeal notwithstanding
that the other counsel on record has not received a copy of the decision or resolution. 71

In the present case, PDB was represented by both Janda Asia & Associates and DivinaLaw. It was
not disputed that Janda Asia & Associates, which remained a counsel of record, albeit, as
collaborating counsel, received notice of the CA's March 5, 2013 Resolution on March 12, 2013. As
such, it is from this date, and not from DivinaLaw's receipt of the notice of said resolution on April 3,
2013 that the fifteen (15)-day period  to file the petition for review on certiorari before the Court
72

started to run. Hence, petitioners only had until March 27, 2013 to file a petition for review
on certiorari before the Court, and the petition filed on April 18, 2013 was filed out of time. Notably,
there is no showing that the CA had already resolved PAGTI's motion for substitution;   hence, it
73

remained bound by the proceedings and the judgment rendered against its transferor, PDB.
Generally, the failure to perfect an appeal in the manner and within the period provided for by law
renders the decision appealed from final and executory,   and beyond the competence of the Court
74
to review. However, the Court has repeatedly relaxed this procedural rule in the higher interest of
substantial justice. In Barnes v. Padilla, it was held that:
75

[A] final and executory judgment can no longer be attacked by any of the parties or be modified,
directly or indirectly, even by the highest court of the land.

However, this Court has relaxed this rule in order to serve substantial justice[,] considering (a)
matters of life, liberty, honor or property, (b) the existence of special or compelling circumstances, (c)
the merits of the case, (d) a cause not entirely attributable to the fault or negligence of the party
favored by the suspension of the rules, (e) a lack of any showing that the review sought is merely
frivolous and dilatory, and (f) the other party will not be unjustly prejudiced thereby. 
76

After a meticulous scrutiny of this case, the Court finds that the unjustified rehabilitation of
respondents, by virtue of the CA ruling if so allowed to prevail, warrants the relaxation of the
procedural rule violated by petitioners in the higher interest of substantial justice. The reasons
therefor are hereunder explained.

II.

Rehabilitation is statutorily defined under Republic Act No. 10142,  otherwise known as the
77

"Financial Rehabilitation and Insolvency Act of 2010" (FRIA), as follows:

Section 4. Definition of Terms. - As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful

operation and solvency, if it is shown that its continuance of operation is economically feasible and
its creditors can recover by way of the present value of payments projected in the plan, more if the
debtor continues as a going concern than if it is immediately liquidated. (Emphasis supplied)

Case law explains that corporate rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency, the purpose being to enable the company to gain a new
lease on life and allow its creditors to be paid their claims out of its earnings.   Thus, the basic
78

issues in rehabilitation proceedings concern the viability and desirability of continuing the business
operations of the distressed corporation,  all with a view of effectively restoring it to a state of
79

solvency or to its former healthy financial condition through the adoption of a rehabilitation plan.

III.

In the present case, however, the Rehabilitation Plan failed to comply with the minimum
requirements, i.e.: (a) material financial commitments to support the rehabilitation plan; and (b) a
proper liquidation analysis, under Section 18, Rule 3 of the 2008 Rules of Procedure on Corporate
Rehabilitation  (Rules), which Rules were in force at the time respondents' rehabilitation petition was
80

filed on April 8, 2011:

Section 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business
targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of
such rehabilitation which shall include the manner of its implementation, giving due regard to the
interests of secured creditors such as, but not limited, to the non-impairment of their security liens or
interests; (c) the material financial commitments to support the rehabilitation plan; (d) the
means for the execution of the rehabilitation plan, which may include debt to equity conversion,
restructuring of the debts, dacion en pago or sale or exchange or any disposition of assets or of the
interest of shareholders, partners or members; (e) a liquidation analysis setting out for each
creditor that the present value of payments it would receive under the plan is more than that
which it would receive if the assets of the debtor were sold by a liquidator within a six-month
period from the estimated date of filing of the petition; and (f) such other relevant information to
enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation
plan. (Emphases supplied)

The Court expounds.

A. Lack of Material Financial Commitment

to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve, determination,

earnestness, and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-be
investors of the debtor-corporation indicating their readiness, willingness, and ability to contribute
funds or property to guarantee the continued successful operation of the debtor-corporation
during the period of rehabilitation. 81

In this case, respondents' Chief Operating Officer, Primo D. Mateo, Jr., in his executed Affidavit of
General Financial Condition  dated April 8, 2011, averred that respondents will not require the
82

infusion of additional capital as he, instead, proposed to have all accrued penalties, charges, and
interests waived, and a reduced interest rate prospectively applied to all respondents' obligations, in
addition to the implementation of a two (2)-year grace period.  Thus, there appears to be no
83

concrete plan to build on respondents' beleaguered financial position through substantial

investments as the plan for rehabilitation appears to be pegged merely on financial reprieves.
Anathema to the true purpose of rehabilitation, a distressed corporation cannot be restored to its
former position of successful operation and regain solvency by the sole strategy of delaying
payments/waiving accrued interests and penalties at the expense of the creditors.

The Court also notes that while respondents have substantial total assets, a large portion of the
assets of Fastech Synergy  and Fastech Properties  is comprised of noncurrent assets,   such as
84 85 86

advances to affiliates which include Fastech Microassembly,   and investment properties which form
87

part of the common assets of Fastech Properties, Fastech Electronique, and Fastech
Microassembly.  Moreover, while there is a claim that unnamed customers have made investments
88

by way of consigning production equipment, and advancing money to fund procurement of various
equipment intended to increase production capacity,  this can hardly be construed as a material
89

financial commitment which would inspire confidence that the rehabilitation would turn out to be
successful. Case law holds that nothing short of legally binding investment commitment/s from third
parties is required to qualify as a material financial commitment.  Here, no such binding investment
90

was presented.

B. Lack of Liquidation Analysis.

Respondents likewise failed to include any liquidation analysis in their Rehabilitation Plan. The total
liquidation assets and the estimated liquidation return to the creditors, as well as the fair market
value vis-a-vis the forced liquidation value of the fixed assets were not shown. As such, the Court
could not ascertain if the petitioning debtor's creditors can recover by way of the present value of
payments projected in the plan, more if the debtor continues as a going concern than if it is
immediately liquidated. This is a crucial factor in a corporate rehabilitation case, which the CA,
unfortunately, failed to address.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to support
rehabilitation, as well as to include a liquidation analysis, renders the CA's considerations for
approving the same, i.e., that: (a) respondents would be able to meet their obligations to their
creditors within their operating cash profits and other assets without disrupting their business
operations; (b)the Rehabilitation Receiver's opinion carries great weight; and (c) rehabilitation will be
beneficial for respondents' creditors, employees, stockholders, and the economy,  as 91

actually unsubstantiated, and hence, insufficient to decree the feasibility of respondents'

rehabilitation. It is well to emphasize that the remedy of rehabilitation should be denied to
corporations that do not qualify under the Rules. Neither should it be allowed to corporations whose
sole purpose is to delay the enforcement of any of the rights of the creditors.

Even if the Court were to set aside the failure of the Rehabilitation Plan to comply with the
fundamental requisites of material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, a review of the financial documents presented by respondents
fails to convince the Court of the feasibility of the proposed plan.

IV.

The test in evaluating the economic feasibility of the plan was laid down in Bank of the Philippine
Islands v. Sarabia Manor Hotel Corporation  (Bank of the Philippine Islands), to wit:
92

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough
examination and analysis of the distressed corporation's financial data must be conducted. If the
results of such examination and analysis show that there is a real opportunity to rehabilitate the
corporation in view of the assumptions made and financial goals stated in the proposed rehabilitation
plan, then it may be said that a rehabilitation is feasible. In this accord, the rehabilitation court should
not hesitate to allow the corporation to operate as an on-going concern, albeit under the terms and
conditions stated in the approved rehabilitation plan. On the other hand, if the results of the financial
examination and analysis clearly indicate that there lies no reasonable probability that the distressed
corporation could be revived and that liquidation would, in fact, better subserve the interests of its
stakeholders, then it may be said that a rehabilitation would not be feasible. In such case, the
rehabilitation court may convert the proceedings into one for liquidation. 93

In the recent case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Jnc., the Court took
94

note of the characteristics of an economically feasible rehabilitation plan as opposed to an infeasible

rehabilitation plan:

Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests specific
characteristics of an economically feasible rehabilitation plan:

a. The debtor has assets that can generate more cash if used in its daily operations than if sold.

b. Liquidity issues can be addressed by a practicable business plan that will generate enough cash
to sustain daily operations.
c. The debtor has a definite source of financing for the proper and full implementation of a
Rehabilitation Plan that is anchored on realistic assumptions and goals.

These requirements put emphasis on liquidity: the cash flow that the distressed corporation will
obtain from rehabilitating its assets and operations. A corporation's assets may be more than its
current liabilities, but some assets may be in the form of land or capital equipment, such as
machinery or vessels. Rehabilitation sees to it that these assets generate more value if used
efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan that is infeasible:

(a) the absence of a sound and workable business plan;

(b) baseless and unexplained assumptions, targets and goals;

(c) speculative capital infusion or complete lack thereof for the execution of the business plan;

(d) cash flow cannot sustain daily operations; and

(e) negative net worth and the assets are near full depreciation or fully depreciated.

In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also suggests that the
Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on rehabilitation that provides
for better present value recovery for its creditors.

Present value recovery acknowledges that, in order to pave way for rehabilitation, the creditor will
not be paid by the debtor when the credit falls due. The court may order a suspension of payments
to set a rehabilitation plan in motion; in the meantime, the creditor remains unpaid. By the time the
creditor is paid, the financial and economic conditions will have been changed. Money paid in the
past has a different value in the future. It is unfair if the creditor merely receives the face value of the
debt. Present value of the credit takes into account the interest that the amount of money would
have earned if the creditor were paid on time.

Trial courts must ensure that the projected cash flow from a business' rehabilitation plan allows for
the closest present value recovery for its creditors. If the projected cash flow is realistic and allows
the corporation to meet all its obligations, then courts should favor rehabilitation over liquidation.
However, if the projected cash flow is unrealistic, then courts should consider converting the
proceedings into that for liquidation to protect the creditors.95

A perusal of the 2009 audited financial statements shows that respondents' cash operating
position  was not even enough to meet their maturing obligations. Notably, their current assets were
96

materially lower than their current liabilities,  and consisted mostly of advances to related parties in
97

the case of Fastech Microassembly, Fastech Electronique, and Fastech Properties.  Moreover, the
98

independent auditors recognized the absence of available historical or reliable market information to
support the assumptions made by the management to determine the recoverable amount (value in
use) of respondents' properties and equipment. 99

On the other hand, respondents' unaudited financial statements for the year 2010, and the months of
February and March 2011 were unaccompanied by any notes or explanation on how the figures
were arrived at. Besides, respondents' cash operating position remained insufficient to meet their
maturing obligations as their current assets are still substantially lower than their current
liabilities.   The Court also notes the RTC-Makati's observation that respondents added new
100

accounts and/or deleted/omitted certain accounts,   but failed to explain or justify the same.
101

Verily, respondents' Rehabilitation Plan should have shown that they have enough serviceable
assets to be able to continue its business operation. In fact, as opposed to this objective, the revised
Rehabilitation Plan still requires "front load Capex spending" to replace common equipment and
facility equipment to ensure sustainability of capacity and capacity robustness,   thus, further
102

sacrificing respondents' cash flow. In addition, the Court is hard-pressed to see the effects of the
outcome of the streamlining of respondents' manufacturing operations on the carrying value of their
existing properties and equipment.

In fine, the Rehabilitation Plan and the financial documents submitted in support thereof fail to show
the feasibility of rehabilitating respondents' business.

V.

The CA's reliance on the expertise of the court-appointed Rehabilitation Receiver, who opined that
respondents' rehabilitation is viable, in order to justify its finding that the financial statements
submitted were reliable, overlooks the fact that the determination of the validity and the approval of
the rehabilitation plan is not the responsibility of the rehabilitation receiver, but remains the function
of the court. The rehabilitation receiver's duty prior to the court's approval of the plan is to study the
best way to rehabilitate the debtor, and to ensure that the value of the debtor's properties is
reasonably maintained; and after approval, to implement the rehabilitation plan.   Notwithstanding
103

the credentials of the court-appointed rehabilitation receiver, the duty to determine the feasibility of
the rehabilitation of the debtor rests with the court. While the court may consider the receiver's report
favorably recommending the debtor's rehabilitation, it is not bound thereby if, in its judgment, the
debtor's rehabilitation is not feasible.

The purpose of rehabilitation proceedings is not only to enable the company to gain a new lease on
life, but also to allow creditors to be paid their claims from its earnings when so rehabilitated. Hence,
the remedy must be accorded only after a judicious regard of all stakeholders' interests; it is not a
one-sided tool that may be graciously invoked to escape every position of distress.   Thus, the
104

remedy of rehabilitation should be denied to corporations whose insolvency appears to be

irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors,
which is rendered obvious by: (a)the absence of a sound and workable business plan; (b)baseless
and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete
lack thereof for the execution of the business plan,   as in this case.
105

VI.

In view of all the foregoing, the Court is therefore constrained to grant the instant petition,
notwithstanding the preliminary technical error as above-discussed. A distressed corporation should
not be rehabilitated when the results of the financial examination and analysis clearly indicate that
there lies no reasonable probability that it may be revived, to the detriment of its numerous
stakeholders which include not only the corporation's creditors but also the public at large. In Bank
of the Philippine Islands: 106

Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been
crafted in order to give companies sufficient leeway to deal with debilitating financial predicaments in
the hope of restoring or reaching a sustainable operating form if only to best accommodate the
various interests of all its stakeholders, may it be the corporation's stockholders, its creditors, and
even the general public.  107
Thus, the higher interest of substantial justice will be better subserved by the reversal of the CA
Decision. Since the rehabilitation petition should not have been granted in the first place, it is of no
moment that the Rehabilitation Plan is currently under implementation. While payments in
accordance with the Rehabilitation Plan were already made, the same were only possible because
of the financial reprieves and protracted payment schedule accorded to respondents, which, as
above-intimated, only works at the expense of the creditors and ultimately, do not meet the true
purpose of rehabilitation.

WHEREFORE, the petition is GRANTED. The Decision dated September 28, 2012 and the
Resolution dated March 5, 2013 of the Court of Appeals in CA-G.R. SP No. 122836 are
hereby REVERSED and SET ASIDE. Accordingly, the Joint Petition for corporate rehabilitation filed
by respondents Fastech Synergy Philippines, Inc. (formerly First Asia System Technology, Inc.),
Fastech Microassembly & Test, Inc., Fastech Electronique, Inc., and Fastech Properties, Inc., before
the Regional Trial Court ofMakati City, Branch 149 in SP Case No. M-7130 is DISMISSED.

SO ORDERED.

G.R. No. 177382

VIVA SHIPPING LINES, INC., Petitioner,

vs.
KEPPEL PHILIPPINES MINING, INC., METROPOLITAN BANK & TRUST COMPANY, PILIPINAS
SHELL PETROLEUM CORPORATION, CITY OF BATANGAS, CITY OF LUCENA, PROVINCE OF
QUEZON, ALEJANDRO OLIT, NIDA MONTILLA, PIO HERNANDEZ, EUGENIO BACULO, and
HARLAN BACALTOS, Respondents.

DECISION

LEONEN, J.:

Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and decisions in
corporate rehabilitation cases filed under the Interim Rules of Procedure on Corporate
Rehabilitation.   Liberality in the application of the rules is not an end in itself. It must be pleaded with
1

factual basis and must be allowed for equitable ends. There must be no indication that the violation
of the rule is due to negligence or design. Liberality is an extreme exception, justifiable only when
equity exists.

On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for Corporate
Rehabilitation before the Regional Trial Court of Lucena City.  The Regional Trial Court initially
2

denied the Petition for failure to comply with the requirements in Rule 4, Sections 2 and 3 of the
Interim Rules of Procedure on Corporate Rehabilitation.  On October 17, 2005, Viva Shipping Lines
3

filed an Amended Petition. 4

In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime vessels  and 5

Ocean Palace Mall, a shopping mall in downtown Lucena City.  Viva Shipping Lines also declared its
6

total properties’ assessed value at about ₱45,172,790.00.  However, these allegations were contrary
7

to the attached documents in the Amended Petition.

One of the attachments, the Property Inventory List, showed that Viva Shipping Lines owned only
two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen.  The list also stated that
8

the fair market value of all of Viva Shipping Lines’ assets amounted to ₱447,860,000.00,  ₱400 9
million more than what was alleged in its Amended Petition. Some of the properties listed in the
Property Inventory List were already marked as "encumbered" by its creditors;  hence, only
10

₱147,630,000.00 of real property and its vessels were marked as "free assets." 11

Viva Shipping Lines also declared the following debts:

Amount of
Name of Creditor Nature of Debts
Obligation
Loan secured by Real
(1) Metropolitan Bank & Trust Company Estate Mortgage ₱176,428,745.50
Charges for Repair of
(2) Keppel Philippines Marine, Inc. Vessels 9,000,000.00+
(3) Province of Quezon, Lucena City, and Realty Taxes and
Province of Batangas, Batangas City Assessments 35,000,000.00+
  TOTAL 12
₱220,428,745.50+

According to Viva Shipping Lines, the devaluation of the Philippine peso, increased competition, and
mismanagement of its businesses made it difficult to pay its debts as they became due.  It also 13

stated that "almost all [its] vessels were rendered unserviceable either because of age and
deterioration that [it] can no longer compete with modern made vessels owned by other operators." 14

In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of funding
such as the sale of old vessels and commercial lots of its sister company, Sto. Domingo Shipping
Lines.  It also proposed the conversion of the Ocean Palace Mall into a hotel, the acquisition of two
15

(2) new vessels for shipping operations, and the "re-operation"  of an oil mill in Buenavista,
16

Quezon. 17

Viva Shipping Lines nominated two individuals to be appointed as rehabilitation receiver: Armando
F. Ragudo, a businessman from Tayabas, Quezon, and Atty. Calixto Ferdinand B. Dauz III, a lawyer
from Lucena City.  A day after filing the Amended Petition, Viva Shipping Lines submitted the name
18

of a third nominee, Former Judge Jose F. Mendoza (Judge Mendoza). 19

On October 19, 2005, the Regional Trial Court found that Viva Shipping Lines’ Amended Petition to
be "sufficient in form and substance," and issued a stay order.  It stayed the enforcement of all
20

monetary and judicial claims against Viva Shipping Lines, and prohibited Viva Shipping Lines from
selling, encumbering, transferring, or disposing of any of its properties except in the ordinary course
of business.  The Regional Trial Court also appointed Judge Mendoza as rehabilitation receiver.
21

Before the initial hearing scheduled on December 5, 2005, the City of Batangas, Keppel Philippines
Marine, Inc., and Metropolitan Bank and Trust Company (Metrobank) filed their respective
comments and oppositions to Viva Shipping Lines’ Amended Petition. 22

During the initial hearing, Pilipinas Shell Petroleum Corporation (Pilipinas Shell) moved for additional
time to write its opposition to Viva Shipping Lines’ Amended Petition.  Pilipinas Shell later filed its
23

Comment/Opposition with Formal Notice of Claim. 24

Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a Manifestation and
Registration of Monetary Claim stating that Viva Shipping Lines owes her ₱232,000.00 as separation
and 13th month pay.  The Securities and Exchange Commission filed a Comment informing the
25

Regional Trial Court that Viva Shipping Lines violated certain laws and rules of the Commission. 26

On March 24, 2006, Judge Mendoza withdrew his acceptance of appointment as rehabilitation
receiver.  As replacement, Viva Shipping Lines nominated Atty. Antonio Acyatan, while Metrobank
27

nominated Atty. Rosario S. Bernaldo.  Keppel Philippines Marine, Inc.  adopted Metrobank’s
28
1âwphi1

nomination. 29

On April 4, 2006, Metrobank filed a Motion for Production or Inspection of relevant documents
relating to Viva Shipping Lines’ business operations such as board resolutions, tax returns,
accounting ledgers, bank accounts, and contracts.  Viva Shipping Lines filed its opposition.
30

However, the Regional Trial Court granted Metrobank’s Motion.  Viva Shipping Lines failed to
31

comply with the Order to produce the documents,  as well as with the Regional Trial Court Order to
32

submit a memorandum. 33

On September 27, 2006, Viva Shipping Lines’ former employees Alejandro Olit, Nida Montilla, Pio
Hernandez, Eugenio Baculo, and Harlan Bacaltos  (Alejandro Olit, et al.) filed their comment on the
34

Amended Petition, informing the Regional Trial Court of their pending complaint against Viva
Shipping Lines before the National Labor Relations Commission. 35

In the Order dated October 30, 2006,36 the Regional Trial Court lifted the stay order and dismissed
Viva Shipping Lines’ Amended Petition for failure to show the company’s viability and the feasibility
of rehabilitation. The Regional Trial Court summarized Viva Shipping Lines’ creditors and debts: 37

Amount of
Name of Creditor Nature of Debts 38

Obligation
1 Batangas City Real Estate Taxes ₱264,006.52
2 Keppel Philippines Marine, Inc. Charges for Repair of Vessels 20,054,977.84
3 Metropolitan Bank & Trust Loan secured by Real Estate
Company Mortgage 191,963,465.79
4 Pilipinas Shell Petroleum Corp. Supply Agreement 20,546,797.74
5 Luzviminda C. Cueto Labor 232,000.00
  TOTAL ₱233,061,247.89

The Regional Trial Court also noted the following as Viva Shipping Lines’ free assets: 39

Assessed
Nature of Property Market Value
Value
1. Agricultural/Industrial Lot in San Narciso, Quezon ₱
covered by TCT No. T-155423 16,493,050.00 ₱ 40,000,000.00
2. Agricultural Lot located at San Andres, Quezon covered
by TCT No. T-215549 1,235,010.00 47,630,000.00
3. MV Viva Peñafrancia 5   30,000,000.00
4. MV Marian Queen 40
  30,000,000.00
 ₱
  TOTAL 147,630,000.00

The Regional Trial Court found that Viva Shipping Lines’ assets all appeared to be non-performing.
Further, it noted that Viva Shipping Lines failed to show any evidence of consent to sell real
properties belonging to its sister company. 41

Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules of Court before
the Court of Appeals.  It only impleaded Hon. Adolfo V. Encomienda, the Presiding Judge of the trial
42

court that rendered the assailed decision. It did not implead any of its creditors, but served copies of
the Petition on counsels for Metrobank, Keppel Philippines Marine, Inc., Pilipinas Shell, City of
Batangas, Province of Quezon, and City of Lucena.  Viva Shipping Lines neither impleaded nor
43

served a copy of the Petition on its former employees or their counsels.

The Court of Appeals dismissed Viva Shipping Lines’ Petition for Review in the Resolution dated
January 5, 2007.  It found that Viva Shipping Lines failed to comply with procedural requirements
44

under Rule 43.  The Court of Appeals ruled that due to the failure of Viva Shipping Lines to implead
45

its creditors as respondents, "there are no respondents who may be required to file a comment on
the petition, pursuant to Section 8 of Rule 43." 46

Viva Shipping Lines moved for reconsideration.  It argued that its procedural misstep was cured
47

when it served copies of the Petition on the Regional Trial Court and on its former employees.  In 48

the Resolution dated March 30, 2007, the Court of Appeals denied Viva Shipping Lines’ Motion for
Reconsideration. 49

Viva Shipping Lines filed before this court a Petition for Review on Certiorari assailing the January 5,
2007 and March 30, 2007 Court of Appeals Resolutions.  It prayed that the case be remanded to the
50

Court of Appeals for adjudication on the merits. 51

Without necessarily giving due course to the Petition, this court required respondents to
comment.  Keppel Philippines Marine, Inc.,  Pilipinas Shell,  Metrobank,  former employees
52 53 54 55

Alejandro Olit et al.,  the City of Batangas,  the City Treasurer of Lucena,  and the Provincial
56 57 58

Treasurer of Quezon  filed their respective Comments.

59

On September 17, 2008,  December 10, 2008,  and July 20, 2009,  this court required Viva
60 61 62

Shipping Lines to file replies to respondents’ comments. Viva Shipping Lines’ counsel, Abesamis
Law Office, withdrew its representation, which was accepted by this court.  Viva Shipping Lines was 63

unable to file its consolidated reply; hence, this court resolved that Viva Shipping Lines’ right to file a
consolidated reply was deemed waived. 64

On September 1, 2011, Atty. Vicente M. Joyas (Atty. Joyas) entered his appearance as Viva
Shipping Lines’ new counsel.  Atty. Joyas moved for several extensions of time to comply with this
65

court’s order to file a consolidated reply. This court allowed Atty. Joyas’ Motions, and Viva Shipping
Lines’ consolidated reply was noted in our Resolution dated December 7, 2011.  This court then 66

ordered the parties to submit their respective memoranda. 67

Viva Shipping Lines, Inc.  and respondents Pilipinas Shell,  Keppel Philippines Marine, Inc.,  and
68 69 70

Metrobank  submitted their respective memoranda. This court dispensed with the filing of the other
71

respondents’ memoranda. 72

We resolve the following issues:

First, whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines’ Petition for
Review on procedural grounds; and

Second, whether petitioner was denied substantial justice when the Court of Appeals did not give
due course to its petition.

Petitioner argues that the Court of Appeals should have given due course to its Petition and excused
its non-compliance with procedural rules.  For petitioner, the Interim Rules of Procedure on
73

Corporate Rehabilitation mandates a liberal construction of procedural rules, which must prevail over
the strict application of Rule 43 of the Rules of Court. 74

According to petitioner, this court disfavors dismissals based on pure technicalities and adopts a
policy stating that rules on appeal are "not iron-clad and must yield to loftier demands of substantial
[j]ustice and equity."  For petitioner, the immediate dismissal of its Petition for Review is contrary to
75

the purpose of corporate rehabilitation to rescue and rehabilitate financially distressed companies. 76

Respondents, on the other hand, argue that the dismissal of petitioner’s Petition for Review was
proper for its failure to implead any of its creditors. Petitioner’s procedural misstep resulted in the
denial of the creditors’ right to due process as they could not file a comment on the
Petition.  Respondent Pilipinas Shell points out that petitioner did not even try to explain why it failed
77

to implead its creditors in its Petition.78

Respondents cite Rule 43, Section 7, which states that non-compliance with any of the requirements
of proof of service of the Petition, and the required contents, shall be sufficient ground for the
dismissal of the Petition.  Compliance with Rule 43 is required under the Interim Rules of Procedure
79

on Corporate Rehabilitation because it is the prescribed mode of appealing trial court decisions and
final orders in corporate rehabilitation cases.  According to respondent Metrobank, contrary to the
80

views of petitioner, the policy of liberality in construction of the Interim Rules of Procedure on
Corporate Rehabilitation are limited to proceedings in the Regional Trial Court, and not with respect
to procedural rules in elevating appeals relating to corporate rehabilitation. 81

Respondents note that because petitioner repeatedly defied procedural rules, it therefore was no
longer entitled to the relaxation of these rules.  Respondent Pilipinas Shell also points out the
82

defects in the verification, certification of non-forum shopping, and attachments of petitioner in its
Petition before this court. 83

Respondent City of Batangas emphasizes that the Rules of Court are promulgated to facilitate the
adjudication of cases. It argues that petitioner should not be afforded equitable considerations as it
acted in bad faith by concealing material information during the rehabilitation proceedings. 84

Respondents further argue that even if the Court of Appeals gave due course to the Petition, it would
still have dismissed the case on the merits. Respondents cite petitioner’s failure to provide material
facts with sufficient particularity in its Amended Petition for Corporate Rehabilitation.  Petitioner also
85

failed to disclose some of its creditors, as well as the several pending cases relating to its financial
liabilities.  It failed to describe with specificity the cause of its inability to pay its debts.  It also failed
86 87

to clarify which vessels were still under its ownership, and which vessels had maritime
liens.  Petitioner merely estimated its liabilities against its creditors.  Respondents also allege that
88 89

petitioner nominated rehabilitators who are professionally connected with its counsel despite the
existence of conflict of interest.90

Respondents point out that petitioner’s admission that almost all its vessels are rendered
unserviceable suggests that rehabilitation is no longer viable.  Former employees also mention that
91
despite petitioner’s desire to rehabilitate, after the Regional Trial Court’s final order, petitioner began
disposing of some of its assets.  Respondents also cannot rely on the plan to sell some of
92

petitioner’s sister company’s properties. They also express doubts regarding petitioner’s plan of
converting its mall to a hotel/restaurant because it had no such experience. Respondents thus
characterize Viva Shipping Lines’ rehabilitation plan as "unrealistic, untested, and improbable." 93

We deny the Petition.

Corporate rehabilitation is a remedy for corporations, partnerships, and associations "who [foresee]
the impossibility of meeting [their] debts when they respectively fall due."  A corporation under
94

rehabilitation continues with its corporate life and activities to achieve solvency,  or a position where
95

the corporation is able to pay its obligations as they fall due in the ordinary course of business.
Solvency is a state where the businesses’ liabilities are less than its assets. 96

Corporate rehabilitation is a type of proceeding available to a business that is insolvent. In general,

insolvency proceedings provide for predictability that commercial obligations will be met despite
business downturns. Stability in the economy results when there is assurance to the investing public
that obligations will be reasonably paid. It is considered state policy

to encourage debtors, both juridical and natural persons, and their creditors to collectively and
realistically resolve and adjust competing claims and property rights[.] . . . [R]ehabilitation or
liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial
affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable treatment of creditors who are similarly situated.
When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly
liquidation of these debtors’ assets and the settlement of their obligations.  (Emphasis supplied)
97

The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because

"assets . . . are often more valuable when so maintained than they would be when
liquidated."  Rehabilitation assumes that assets are still serviceable to meet the purposes of the
98

business. The corporation receives assistance from the court and a disinterested rehabilitation
receiver to balance the interest to recover and continue ordinary business, all the while attending to
the interest of its creditors to be paid equitably. These interests are also referred to as
the rehabilitative and the equitable purposes of corporate rehabilitation. 99

The nature of corporate rehabilitation was thoroughly discussed in Pryce Corporation v. China
Banking Corporation: 100

Corporate rehabilitation is one of many statutorily provided remedies for businesses that experience
a downturn. Rather than leave the various creditors unprotected, legislation now provides for an
orderly procedure of equitably and fairly addressing their concerns. Corporate rehabilitation allows a
court-supervised process to rejuvenate a corporation. . . . It provides a corporation’s owners a sound
chance to re-engage the market, hopefully with more vigor and enlightened services, having learned
from a painful experience.

Necessarily, a business in the red and about to incur tremendous losses may not be able to pay all
its creditors. Rather than leave it to the strongest or most resourceful amongst all of them, the state
steps in to equitably distribute the corporation’s limited resources.
....

Rather than let struggling corporations slip and vanish, the better option is to allow commercial
courts to come in and apply the process for corporate rehabilitation. 101

Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation  reiterates that
102

courts "must endeavor to balance the interests of all the parties that had a stake in the success of
rehabilitating the debtors."  These parties include the corporation seeking rehabilitation, its
103

creditors, and the public in general. 104

The public’s interest lies in the court’s ability to effectively ensure that the obligations of the debtor,
who has experienced severe economic difficulties, are fairly and equitably served. The alternative
might be a chaotic rush by all creditors to file separate cases with the possibility of different trial
courts issuing various writs competing for the same assets. Rehabilitation is a means to temper the
effect of a business downturn experienced for whatever reason. In the process, it gives
entrepreneurs a second chance. Not only is it a humane and equitable relief, it encourages efficiency
and maximizes welfare in the economy.

Clearly then, there are instances when corporate rehabilitation can no longer be achieved. When
rehabilitation will not result in a better present value recovery for the creditors,  the more appropriate
105

remedy is liquidation.106

It does not make sense to hold, suspend, or continue to devalue outstanding credits of a business
that has no chance of recovery. In such cases, the optimum economic welfare will be achieved if the
corporation is allowed to wind up its affairs in an orderly manner. Liquidation allows the corporation
to wind up its affairs and equitably distribute its assets among its creditors.
107

Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at the same

time.  In rehabilitation, corporations have to maintain their assets to continue business operations.
108

In liquidation, on the other hand, corporations preserve their assets in order to sell them. Without
these assets, business operations are effectively discontinued. The proceeds of the sale are
distributed equitably among creditors, and surplus is divided or losses are re-allocated. 109

Proceedings in case of insolvency are not limited to rehabilitation. Our laws have evolved to provide
for different procedures where a debtor can undergo judicially supervised reorganization or
liquidation of its assets. 110

Corporate rehabilitation traces its roots to Act No. 1956, otherwise known as the Insolvency Law of
1909. Under the Insolvency Law, a debtor in possession of sufficient properties to cover all its debts
but foresees the impossibility of meeting them when they fall due may file a petition before the court
to be declared in a state of suspension of payments.  This allows time for the debtor to organize its
111

affairs in order to achieve a state where it can comply with its obligations.

The relief was also provided in the amendatory provisions of Presidential Decree No. 902-A. Section
5 of Presidential Decree No. 902-A states that the Securities and Exchange Commission has
jurisdiction to decide:

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of

payments in cases where the corporation, partnership or association possesses sufficient property
to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or
in cases where the corporation, partnership or association has no sufficient assets to cover its
liabilities, but is under the management of a Rehabilitation Receiver or Management Committee
created pursuant to this Decree.  (Emphasis supplied).
112

In 2000, the jurisdiction of the Securities and Exchange Commission over these cases was
transferred to the Regional Trial Court,  by operation of Section 5.2 of the Securities Regulation
113

Code.  In the same year, this court approved the Interim Rules of Procedure on Corporate
114

Rehabilitation. The Interim Rules of Procedure on Corporate Rehabilitation provides a summary and
non-adversarial proceeding to expedite the resolution of cases for the benefit of the corporation in
need of rehabilitation, its creditors, and the public in general. 115

Currently, the prevailing law and procedure for corporate rehabilitation is the Financial Rehabilitation
and Insolvency Act of 2010 (FRIA).  FRIA provides procedures for the different types of
116

rehabilitation and liquidation proceedings. The Financial Rehabilitation Rules of Procedure was
issued by this court on August 27, 2013. 117

However, since the Regional Trial Court acted on petitioner’s Amended Petition before FRIA was
enacted, Presidential Decree No. 902-A and the Interim Rules of Procedure on Corporate
Rehabilitation were applied to this case. 118

II

The controversy in this case arose from petitioner’s failure to comply with appellate procedural rules
in corporate rehabilitation cases. Petitioner now pleads this court to apply the policy of liberality in
constructing the rules of procedure. 119

We observe that during the corporate rehabilitation proceedings, the Regional Trial Court already
exercised the liberality contemplated by the Interim Rules of Procedure on Corporate Rehabilitation.
The Regional Trial Court initially dismissed Viva Shipping Lines’ Petition but allowed the filing of an
amended petition. Later on, the same court issued a stay order when there were sufficient grounds
to believe that the Amended Petition complied with Rule 4, Section 2 of the Interim Rules of
Procedure on Corporate Rehabilitation. Petitioner was not penalized for its non-compliance with the
court’s order to produce relevant documents or for its non-submission of a memorandum. 120

Even with these accommodations, the trial court still found basis to dismiss the plea for
rehabilitation.

Any final order or decision of the Regional Trial Court may be subject of an appeal.  In Re: Mode of
121

Appeal in Cases Formerly Cognizable by the Securities and Exchange Commission,  this court122

clarified that all decisions and final orders falling under the Interim Rules of Procedure on Corporate
Rehabilitation shall be appealable to the Court of Appeals through a petition for review under Rule
43 of the Rules of Court. 123

New Frontier Sugar Corporation v. Regional Trial Court, Branch 39, Iloilo City  clarifies that an
124

appeal from a final order or decision in corporate rehabilitation proceedings may be dismissed for
being filed under the wrong mode of appeal. 125

New Frontier Sugar doctrinally requires compliance with the procedural rules for appealing corporate
rehabilitation decisions. It is true that Rule 1, Section 6 of the Rules of Court provides that the "[r]ules
shall be liberally construed in order to promote their objective of securing a just, speedy and
inexpensive disposition of every action and proceeding." However, this provision does not negate
the entire Rules of Court by providing a license to disregard all the other provisions. Resort to liberal
construction must be rational and well-grounded, and its factual bases must be so clear such that
they outweigh the intent or purpose of an apparent reading of the rules.

Rule 43 prescribes the mode of appeal for corporate rehabilitation cases:

Sec. 5. How appeal taken. – Appeal shall be taken by filing a verified petition for review in seven (7)
legible copies with the Court of Appeals, with proof of service of a copy thereof on the adverse party
and on the court or agency a quo. The original copy of the petition intended for the Court of Appeals
shall be indicated as such by the petitioner.

....

Sec. 6. Contents of the petition. – The petition for review shall (a) state the full names of the parties
to the case, without impleading the court or agencies either as petitioners or respondents; (b)
contain a concise statement of the facts and issues involved and the grounds relied upon for the
review; (c) be accompanied by a clearly legible duplicate original or a certified true copy of the
award, judgment, final order or resolution appealed from, together with certified true copies of such
material portions of the record referred to therein and other supporting papers; and (d) contain a
sworn certification against forum shopping as provided in the last paragraph of section 2, Rule 42.
The petition shall state the specific material dates showing that it was filed within the period fixed
herein. (Emphasis supplied)

Petitioner did not comply with some of these requirements. First, it did not implead its creditors as
respondents. Instead, petitioner only impleaded the Presiding Judge of the Regional Trial Court,
contrary to Section 6(a) of Rule 43. Second, it did not serve a copy of the Petition on some of its
creditors, specifically, its former employees. Finally, it did not serve a copy of the Petition on the
Regional Trial Court.

Petitioner justified its failure to furnish its former employees with copies of the Petition by stating that
the former employees were late in filing their opposition before the trial court.  It also stated that its
126

failure to furnish the Regional Trial Court with a copy of the Petition was unintentional. 127

The Court of Appeals correctly dismissed petitioner’s Rule 43 Petition as a consequence of non-
compliance with procedural rules. Rule 43, Section 7 of the Rules of Court states:

Sec. 7. Effect of failure to comply with requirements. – The failure of the petitioner to comply with
any of the foregoing requirements regarding the payment of the docket and other lawful fees, the
deposit of costs, proof of service of the petition, and the contents of and the documents which should
accompany the petition shall be sufficient ground for the dismissal thereof.

Petitioner admitted its failure to comply with the rules. It begs the indulgence of the court to give due
course to its Petition based on their belated compliance with some of these procedural rules and the
policy on the liberal construction of procedural rules.

There are two kinds of "liberality" with respect to the construction of provisions of law. The first
requires ambiguity in the text of the provision and usually pertains to a situation where there can be
two or more viable meanings given the factual context presented by a case. Liberality here means a
presumption or predilection to interpret the text in favor of the cause of the party requesting for
"liberality."
Then there is the "liberality" that actually means a request for the suspension of the operation of a
provision of law, whether substantive or procedural. This liberality requires equity. There may be
some rights that are not recognized in law, and if courts refuse to recognize these rights, an unfair
situation may arise.  Specifically, the case may be a situation that was not contemplated on or was
128

not possible at the time the legal norm was drafted or promulgated.

It is in the second sense that petitioner pleads this court.

III

Our courts are not only courts of law, but are also courts of equity.  Equity is justice outside legal
129

provisions, and must be exercised in the absence of law, not against it.  In Reyes v. Lim:  Equity
130 131

jurisdiction aims to do complete justice in cases where a court of law is unable to adapt its
judgments to the special circumstances of a case because of the inflexibility of its statutory or legal
jurisdiction. Equity is the principle by which substantial justice may be attained in cases where the
prescribed or customary forms of ordinary law are inadequate.  (Citation omitted)
132

Liberality lies within the bounded discretion of a court to allow an equitable result when the proven
circumstances require it. Liberality acknowledges a lacuna in the text of a provision of law. This may
be because those who promulgated the rule may not have foreseen the unique circumstances of a
case at bar. Human foresight as laws and rules are prepared is powerful, but not perfect.

Liberality is not an end in itself. Otherwise, it becomes a backdoor disguising the arbitrariness or
despotism of judges and justices. In North Bulacan Corp. v. PBCom,  the Regional Trial Court
133

ignored several procedural rules violated by the petitioning corporation and allowed rehabilitation in
the guise of liberality. This court found that the Regional Trial Court grossly abused its authority
when it allowed rehabilitation despite the corporation’s blatant non-compliance with the rules.

The factual antecedents of a plea for the exercise of liberality must be clear. There must also be a
showing that the factual basis for a plea for liberality is not one that is due to the negligence or
design of the party requesting the suspension of the rules. Likewise, the basis for claiming an
equitable result—for all the parties—must be clearly and sufficiently pleaded and argued. Courts
exercise liberality in line with their equity jurisdiction; hence, it may only be exercised if it will result in
fairness and justice.

IV

The first rule breached by petitioner is the failure to implead all the indispensable parties. Petitioner
did not even interpose reasons why it should be excused from compliance with the rule to "state the
full names of the parties to the case, without impleading the court . . . as . . . respondents." Petitioner
did exactly the opposite. It failed to state the full names of its creditors as respondents. Instead, it
impleaded the Presiding Judge of the originating court.

The Rules of Court requires petitioner to implead respondents as a matter of due process. Under the
Constitution, "[n]o person shall be deprived of life, liberty or property without due process of the
law."  An appeal to a corporate rehabilitation case may deprive creditor-stakeholders of property.
134

Due process dictates that these creditors be impleaded to give them an opportunity to protect the
property owed to them.

Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is non-
adversarial. In Boston Equity Resources, Inc. v. Court of Appeals: 135
An indispensable party is one who has such an interest in the controversy or subject matter of a
case that a final adjudication cannot be made in his or her absence, without injuring or affecting that
interest. He or she is a party who has not only an interest in the subject matter of the controversy,
but "an interest of such nature that a final decree cannot be made without affecting [that] interest or
leaving the controversy in such a condition that its final determination may be wholly inconsistent
with equity and good conscience. It has also been considered that an indispensable party is a
person in whose absence there cannot be a determination between the parties already before the
court which is effective, complete or equitable." Further, an indispensable party is one who must be
included in an action before it may properly proceed. 136

A corporate rehabilitation case cannot be decided without the creditors’ participation. The court’s role
is to balance the interests of the corporation, the creditors, and the general public. Impleading
creditors as respondents on appeal will give them the opportunity to present their legal arguments
before the appellate court. The courts will not be able to balance these interests if the creditors are
not parties to a case. Ruling on petitioner’s appeal in the absence of its creditors will not result in
judgment that is effective, complete, and equitable.

This court cannot exercise its equity jurisdiction and allow petitioner to circumvent the requirement to
implead its creditors as respondents. Tolerance of such failure will not only be unfair to the creditors,
it is contrary to the goals of corporate rehabilitation, and will invalidate the cardinal principle of due
process of law.

The failure of petitioner to implead its creditors as respondents cannot be cured by serving copies of
the Petition on its creditors. Since the creditors were not impleaded as respondents, the copy of the
Petition only serves to inform them that a petition has been filed before the appellate court. Their
participation was still significantly truncated. Petitioner’s failure to implead them deprived them of a
fair hearing. The appellate court only serves court orders and processes on parties formally named
and identified by the petitioner. Since the creditors were not named as respondents, they could not
receive court orders prompting them to file remedies to protect their property rights.

The next procedural rule that petitioner pleaded to suspend is the rule requiring it to furnish all
parties with copies of the Rule 43 Petition. Petitioner admitted its failure to furnish its former
employees with copies of the Petition because they belatedly filed their claims before the Regional
Trial Court.

This argument is specious at best; at worst, it foists a fraud on this court. The former employees
were unable to raise their claims on time because petitioner did not declare them as creditors. The
Amended Petition did not contain any information regarding pending litigation between petitioner and
its former employees. The only way the former employees could become aware of the corporate
rehabilitation proceedings was either through the required publication or through news informally
circulated among their colleagues. Clearly, it was petitioner who caused the belated filing of its
former employees’ claims when it failed to notify its employees of the corporate rehabilitation
proceedings. Petitioner’s failure was conveniently and disreputably hidden from this court.

Former employee Luzviminda C. Cueto filed her Manifestation and Registration of Monetary Claim
as early as November 25, 2005. Alejandro Olit, et al., the other employees, filed their Comment on
September 27, 2006. By the time petitioner filed its Petition for Review dated November 21, 2006
before the Court of Appeals, it was well aware that these individuals had expressed their interest in
the corporate rehabilitation proceedings. Petitioner and its counsel had no excuse to exclude these
former employees as respondents on appeal.
Petitioner’s belated compliance with the requirement to serve the Petition for Review on its former
employees did not cure the procedural lapse. There were two sets of employees with claims against
petitioner: Luzviminda C. Cueto and Alejandro Olit, et al. When the Court of Appeals dismissed
petitioner’s appeal, petitioner only served a copy on Alejandro Olit, et al. Petitioner still did not serve
a copy on Luzviminda C. Cueto.

We do not see how it will be in the interest of justice to allow a petition that fails to inform some of its
creditors that the final order of the corporate rehabilitation proceeding was appealed. By not
declaring its former employees as creditors in the Amended Petition for Corporate Rehabilitation and
by not notifying the same employees that an appeal had been filed, petitioner consistently denied the
due process rights of these employees.

This court cannot be a party to the inequitable way that petitioner’s employees were treated.

Petitioner also pleaded to be excused from the requirement under Rule 6, Section 5 of the Rules of
Court to serve a copy of the Petition on the originating court. According to petitioner, the annexes for
the Petition for Review filed before the Court of Appeals arrived from Lucena City on the last day of
filing the petition. Petitioner’s representative from Lucena City and petitioner’s counsel rushed to
compile and reproduce all the documents, and in such rush, failed to send a copy to the Regional
Trial Court. When petitioner realized that it failed to furnish the originating court with a copy of the
Petition, a copy was immediately sent by registered mail. 137

Again, petitioner’s excuse is unacceptable. Petitioner had 15 days to file a Rule 43 petition, which
should include the proof of service to the originating court. Rushing the compilation of the pleading
with the annexes has nothing to do with being able to comply with the requirement to submit a proof
of service of the copy of the petition for review to the originating court. If at all, it further reflects the
unprofessional way that petitioner and its counsel treated our rules.

As this court has consistently ruled, "[t]he right to appeal is not a natural right[,] nor a part of due
process; it is merely a statutory privilege, and may be exercised only in the manner and in
accordance with the provisions of the law." 138

In line with this, liberality in corporate rehabilitation procedure only generally refers to the trial court,
not to the proceedings before the appellate court. The Interim Rules of Procedure on Corporate
Rehabilitation covers petitions for rehabilitation filed before the Regional Trial Court. Thus, Rule 2,
Section 2 of the Interim Rules of Procedure on Corporate Rehabilitation, which refers to liberal
construction, is limited to the Regional Trial Court. The liberality was given "to assist the parties in
obtaining a just, expeditious, and inexpensive disposition of the case." 139

In Spouses Ortiz v. Court of Appeals,  the petitioners made a procedural mistake with the
140

attachments of the petition before the Court of Appeals. The petitioners subsequently provided the
correct attachments; however, this court still upheld the Court of Appeals’ dismissal:

The party who seeks to avail [itself] of [an appeal] must comply with the requirements of the rules.
Failing to do so, the right to appeal is lost. Rules of procedure are required to be followed, except
only when for the most persuasive of reasons, they may be relaxed to relieve a litigant of an injustice
not commensurate with the degree of his thoughtlessness in not complying with the procedure
prescribed.141

Petitioner’s excuses do not trigger the application of the policy of liberality in construing procedural
rules. For the courts to exercise liberality, petitioner must show that it is suffering from an injustice
not commensurate to the thoughtlessness of its procedural mistakes. Not only did petitioner exercise
injustice towards its creditors, its Rule 43 Petition for Review did not show that the Regional Trial
Court erred in dismissing its Amended Petition for Corporate Rehabilitation.

Petitioner’s main argument for the continuation of corporate rehabilitation proceedings is that the
Regional Trial Court should have allowed petitioner to clarify its Amended Petition with respect to
details regarding its assets and its liabilities to its creditors instead of dismissing the Petition
outright.
142

The Regional Trial Court correctly dismissed the Amended Petition for Corporate Rehabilitation. The
dismissal of the Amended Petition did not emanate from petitioner’s failure to provide complete
details on its assets and liabilities but on the trial court’s finding that rehabilitation is no longer viable
for petitioner. Under the Interim Rules of Procedure on Corporate Rehabilitation, a "petition shall be
dismissed if no rehabilitation plan is approved by the court upon the lapse of one hundred eighty
(180) days from the date of the initial hearing."  The proceedings are also deemed terminated upon
143

the trial court’s disapproval of a rehabilitation plan, "or a determination that the rehabilitation plan
may no longer be implemented in accordance with its terms, conditions, restrictions, or
assumptions." 144

Bank of the Philippine Islands v. Sarabia Manor Hotel Corp.  provides the test to help trial courts
145

evaluate the economic feasibility of a rehabilitation plan:

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough
examination and analysis of the distressed corporation’s financial data must be conducted. If the
results of such examination and analysis show that there is a real opportunity to rehabilitate the
corporation in view of the assumptions made and financial goals stated in the proposed
rehabilitation plan, then it may be said that a rehabilitation is feasible. In this accord, the
rehabilitation court should not hesitate to allow the corporation to operate as an on-going concern,
albeit under the terms and conditions stated in the approved rehabilitation plan. On the other hand, if
the results of the financial examination and analysis clearly indicate that there lies no reasonable
probability that the distressed corporation could be revived and that liquidation would, in fact, better
subserve the interests of its stakeholders, then it may be said that a rehabilitation would not be
feasible. In such case, the rehabilitation court may convert the proceedings into one for
liquidation.  (Emphasis supplied)
146

Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests specific
characteristics of an economically feasible rehabilitation plan:

a. The debtor has assets that can generate more cash if used in its daily operations than if
sold.

b. Liquidity issues can be addressed by a practicable business plan that will generate
enough cash to sustain daily operations.

c. The debtor has a definite source of financing for the proper and full implementation of a
Rehabilitation Plan that is anchored on realistic assumptions and goals.  (Emhasis supplied)
147

These requirements put emphasis on liquidity: the cash flow that the distressed corporation will
obtain from rehabilitating its assets and operations. A corporation’s assets may be more than its
current liabilities, but some assets may be in the form of land or capital equipment, such as
machinery or vessels. Rehabilitation sees to it that these assets generate more value if used
efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan that is infeasible:

(a) the absence of a sound and workable business plan;

(b) baseless and unexplained assumptions, targets and goals;

(c) speculative capital infusion or complete lack thereof for the execution of the business
plan;

(d) cash flow cannot sustain daily operations; and

(e) negative net worth and the assets are near full depreciation or fully depreciated. 148

In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also suggests that the
Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on rehabilitation that provides
for better present value recovery for its creditors. 149

Present value recovery acknowledges that, in order to pave way for rehabilitation, the creditor will
not be paid by the debtor when the credit falls due. The court may order a suspension of payments
to set a rehabilitation plan in motion; in the meantime, the creditor remains unpaid. By the time the
creditor is paid, the financial and economic conditions will have been changed. Money paid in the
past has a different value in the future.  It is unfair if the creditor merely receives the face value of
150

the debt. Present value of the credit takes into account the interest that the amount of money would
have earned if the creditor were paid on time. 151

Trial courts must ensure that the projected cash flow from a business’ rehabilitation plan allows for
the closest present value recovery for its creditors. If the projected cash flow is realistic and allows
the corporation to meet all its obligations, then courts should favor rehabilitation over liquidation.
However, if the projected cash flow is unrealistic, then courts should consider converting the
proceedings into that for liquidation to protect the creditors.

The Regional Trial Court correctly dismissed petitioner’s rehabilitation plan. It found that petitioner’s
assets are non-performing.  Petitioner admitted this in its Amended Petition when it stated that its
152

vessels were no longer serviceable.  In Wonder Book Corporation v. Philippine Bank of

153

Communications,  a rehabilitation plan is infeasible if the assets are nearly fully or fully depreciated.
154

This reduces the probability that rehabilitation may restore and reinstate petitioner to its former
position of successful operation and solvency.

Petitioner’s rehabilitation plan should have shown that petitioner has enough serviceable assets to
be able to continue its business. Yet, the plan showed that the source of funding would be to sell
petitioner’s old vessels. Disposing of the assets constituting petitioner’s main business cannot result
in rehabilitation. A business primarily engaged as a shipping line cannot operate without its ships.
On the other hand, the plan to purchase new vessels sacrifices the corporation’s cash flow. This is
contrary to the goal of corporate rehabilitation, which is to allow present value recovery for creditors.
The plan to buy new vessels after selling the two vessels it currently owns is neither sound nor
workable as a business plan.
The other part of the rehabilitation plan entails selling properties of petitioner’s sister company.  As
1âwphi1

pointed out by the Regional Trial Court, this plan requires conformity from the sister company. Even
if the two companies have the same directorship and ownership, they are still two separate juridical
entities. In BPI Family Savings Bank v. St. Michael Medical Center,  this court refused to include in
155

the financial and liquidity assessment the financial statements of another corporation that the
petitioning-corporation plans to merge with.

As pointed out by respondents, petitioner’s rehabilitation plan is almost impossible to implement.

Even an ordinary individual with no business acumen can discern the groundlessness of petitioner’s
rehabilitation plan. Petitioner should have presented a more realistic and practicable rehabilitation
plan within the time periods allotted after initiatory hearing, or otherwise, should have opted for
liquidation.

Finally, petitioner argues that after Judge Mendoza’s withdrawal as rehabilitation receiver, the
Regional Trial Court should have appointed a new rehabilitation receiver to evaluate the
rehabilitation plan. We rule otherwise. It is not solely the responsibility of the rehabilitation receiver to
determine the validity of the rehabilitation plan. The Interim Rules of Procedure on Corporate
Rehabilitation allows the trial court to disapprove a rehabilitation plan  and terminate proceedings
156

or, should the instances warrant, to allow modifications to a rehabilitation plan. 157

The Regional Trial Court rendered a decision in accordance with facts and law. Thus, we deny the
plea for liberalization of procedural rules. To grant the plea would cause more economic hardship
and injustice to all those concerned.

WHEREFORE, the Petition is DENIED. The Court of Appeals Resolutions dated January 7, 2007

and March 30, 2007 in CA-G.R. SP No. 96974 are AFFIRMED.

SO ORDERED.
G.R. No. 139437               December 8, 2000

LANGKAAN REALTY DEVELOPMENT, INC., petitioner,

vs.
UNITED COCONUT PLANTERS BANK, and HON. COURT OF APPEALS, respondents.

DECISION

GONZAGA-REYES, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking to set aside the decision of the
Court of Appeals in CA-G.R. No. CV 53514 which affirmed the decision of the Regional Trial Court of
Imus, Cavite, Branch 20, in Civil Case No. 360-89, and the Resolution of the Court of Appeals
denying the petitioner's Motion for Reconsideration.

The antecedent facts are as follows:

Petitioner Langkaan Realty Development Corporation (LANGKAAN, for brevity) was the registered
owner of a 631,693 square meter parcel of land covered by Transfer Certificate of Title No. 111322,
and located at Langkaan, Dasmarinas, Cavite.

On April 8, 1983, petitioner LANGKAAN executed a Real Estate Mortgage over the above-
mentioned property in favor of private respondent United Coconut Planter's Bank (UCPB) as a
security for a loan obtained from the bank by Guimaras Agricultural Development, Inc. (GUIMARAS)
in the amount of P3,000,000.00. LANGKAAN and GUIMARAS agreed to share in the total loan
1 

proceeds that the latter may obtain from UCPB. Subsequently, another loan of P2,000,000.00 was
2 

obtained by GUIMARAS, totaling its obligation to the bank to P5,000,000.00. The loan was fully
secured by the real estate mortgage which covered all obligations obtained from UCPB by either
GUIMARAS or LANGKAAN "before, during or after the constitution" of the mortgage. Also provided
3 

in the mortgage agreement is an acceleration clause stating that any default in payment of the
secured obligations will render all such obligations due and payable, and that UCPB may
immediately foreclose the mortgage. 4

GUIMARAS defaulted in the payment of its loan obligation. On July 28, 1986, private respondent
5 

UCPB filed a "Petition for Sale under Act No. 3135 , as amended", with the Office of the Clerk of
6 

Court and Ex-officio Sheriff of RTC of Imus, Cavite. The "petition" was given due course, and a
Notice of Extra-judicial Sale of LANGKAAN's property was issued by Acting Clerk of Court II and Ex-
officio Sheriff Regalado Eusebio on August 4, 1986, setting the sale on August 29, 1986 at the main
entrance of the Office of the Clerk of Court of RTC of Imus. The Notice of Extra-judicial Sale was
7 

published in the "Record Newsweekly", and was certified by Court Deputy Sheriff Nonilon A. Caniya
8 

to have been duly posted. 9

On August 29, 1986, the mortgaged property was sold for ₱3,095,000.00 at public auction to private
respondent UCPB as the highest bidder, and a corresponding Certificate of Sale was issued in favor
of the bank.

As petitioner LANGKAAN failed to redeem the foreclosed property within the redemption period, the
title of the property was consolidated in the name of UCPB on December 21, 1987, and a new
Transfer Certificate of Title with no. T-232040 was issued in the latter's favor.

On March 31, 1989, LANGKAAN, through counsel, Atty. Franco L. Loyola wrote UCPB a letter
offering to buy back the foreclosed property for ₱4,000,000.00. This offer was rejected by the bank
10 

in a letter dated May 22, 1989, stating that the current selling price for the property was already
₱6,500,000.00. 11

On May 30, 1989, petitioner LANGKAAN filed a Complaint for Annulment of Extra-judicial
Foreclosure and Sale, and of TCT No. 232040 with Damages, with the RTC of Imus, Cavite,
docketed as Civil Case No. 360-89.

After trial, the RTC of Imus ruled in favor of private respondent UCPB, and dismissed the petition of
LANGKAAN for lack of merit. On appeal, the Court of Appeals affirmed en toto the decision of the
RTC of Imus. The petitioner filed a Motion for Reconsideration which was denied by the Court of
Appeals in a Resolution dated July 28, 1999. Hence this petition.

The sole issue in this case, as stated by the petitioner in its Memorandum, is whether or not the
extra-judicial foreclosure sale is valid and legal on account of the alleged non-compliance with the
provisions of Act No. 3135 on venue, posting and publication of the Notice of Sale, and of the
alleged defects in such Notice. 12

At the outset, it must be stated that only questions of law may be raised before this Court in a
Petition for Review under Rule 45 of the Revised Rules of Civil Procedure. This Court is not a trier
13 

of facts, and it is not the function of this Court to re-examine the evidences submitted by the parties. 14

After a careful analysis of the issue set forth by the petitioner, we find the same not to involve a pure
question of law It has been our consistent ruling that the question of compliance or non-compliance
15 

with notice and publication requirements of an extra-judicial foreclosure sale is a factual issue
binding on this Court. In the case of Reyes vs. Court of Appeals, we declined to entertain the
16 

petitioner's argument as to lack of compliance with the requirements of notice and publication
prescribed in Act No. 3135, for being factual. Hence, the matter of sufficiency of posting and
17 

publication of a notice of foreclosure sale need not be resolved by this Court, especially since the
findings of the Regional Trial Court thereon were sustained by the Court of Appeals. Well-
established is the rule that "factual findings of the Court of Appeals are conclusive on the parties and
carry even more weight when the said court affirms the factual findings of the trial court."18

The RTC found the posting of the Notice of Sale to have been duly complied with, thus:

"As regards the posting of the notices of sale, Deputy Sheriff Nonilon Caniya has categorically
declared that he posted the same in three conspicuous places, to wit: (1) Municipal Hall of
Dasmarinas, Cavite, (2) Barangay Hall of Langkaan, and (3) in the place where the property is
located (Exh. "6"). He added gratuitously that he even posted it at the Dasmarinas Public Market.
Such being the case, the negative testimony of Virgilio Mangubat, a retired sheriff of Trece Martires
City, to the effect that he did not see any notice posted in the Bulletin Board of Dasmarinas, Cavite
cannot prevail over the positive testimony of Deputy Sheriff Caniya. In like manner, the general
denial advanced by Barangay Captain Benjamin Sangco of Langkaan that no notice was posted at
the bulletin board of said barangay in August, 1986 cannot take precedence over the positive
declaration of Deputy Sheriff Caniya who is presumed to have performed his duties as such.
Credence is generally accorded the testimonies of (sic) sheriff who is presumed to have performed
their (sic) duties in regular manner. xxx

x x x           x x x          x x x

"xxx In another case, Bonnevie vs. Court of Appeals, 125 SCRA 122, it was even ruled that 'a single
act of posting satisfies the requirement of law'." 19

Due publication was likewise found by the RTC to have been effected.

"It is beyond dispute that notice of Sheriff's Sale was published in "Record Newsweekly", a
newspaper of general circulation in the Province of Cavite after a raffle among the accredited
newspaper thereat. No evidence was adduced by plaintiff to disprove this fact. Its claim that said
newspaper has no subscribers in Cavite is without merit and belied by the Affidavit of Publication
executed by the Publisher of Records Newsweekly (Exh. "5") and by the Clerk of Court and Ex-
Oficio Sheriff of the Multiple Sala of Imus, Cavite. As held in the case of Olizon vs. Court of Appeals,
236 SCRA 148, 'personal notice to the mortgagor in extrajudicial foreclosure proceedings is not
necessary. Sec. 3 of Act No. 3135 governing extra-judicial foreclosure of real estate mortgages, as
amended by Act No. 4118, requires only posting of the notice of sale in three public places and the
publication of that notice in a newspaper of general circulation. Hence, the lack of personal notice to
the mortgagors is not a ground to set aside the foreclosure sale.' It was further held thereat (ibid) that
'publication of the notice alone in the newspaper of general circulation is more than sufficient
compliance with the notice-posting requirement of the law.'" 20

On appeal, the findings of the RTC were sustained by the Court of Appeals, to wit:

"Next, appellant contends that the notice of sale was posted, at the very least, at only one [1] public
place - the Municipal Building of Dasmarinas, Cavite - contrary to and in violation of the requirement
in Act No. 3135, as amended, that said notice shall be posted in at least three [3] public places.
Deputy Sheriff Nonilon Caniya, however, has categorically declared that he had posted Notices of
Sale in four public places; namely: (1) Municipal Hall of Dasmarinas, Cavite, (2) Barangay Hall of
Langkaan, (3) in the place where the property is located and (4) at the Dasmarinas Public Market
(t.s.n., January 12, 1994, pp. 6-11). We give credence to said Sheriff's testimony and accord his
actions with the presumption of regularity of performance, having come from a public officer to whom
no improper motive to testify has been attributed.
"At any rate, even if it were true that the Notice of Sale was not posted in three public places as
required, this would not invalidate the foreclosure conducted. As explained in Olizon vs. Court of
Appeals, 238 SCRA 148, 155-156 -

'Furthermore, unlike the situation in previous cases where the foreclosure sales were annulled by
reason of failure to comply with the notice requirement under Section 3 of Act 3135, as amended,
what is allegedly lacking here is the posting of the notice in three public places, and not the
publication thereof in a newspaper of general circulation.

'We take judicial notice of the fact that newspaper publications have more far-reaching effects than
posting on bulletin boards in public places. There is a greater probability that an announcement or
notice published in a newspaper of general circulation which is distributed nationwide, shall have a
readership of more people than that posted in a public bulletin board, no matter how strategic its
location may be, which caters only to a limited few. Hence the publication of the notice of sale in the
newspaper of general circulation alone is more than sufficient compliance with the notice-posting
requirement of the law. By such publication, a reasonably wide publicity had been effected such that
those interested might attend the public sale, and the purpose of the law had been thereby
subserved.

'The object of a notice of sale is to inform the public of the nature and condition of the property to be
sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing
bidders and to prevent a sacrifice of the property. If these objects are attained, immaterial errors and
mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices
of sale which are calculated to deter or mislead bidders, to depreciate the value of the property, or to
prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the
notice, and also to the sale made pursuant thereto.'

"In the case at bench, this objective was attained considering that there was sufficient publicity of the
sale through the Record Newsweekly.

"Appellant next charges that the certificate of posting executed by Deputy Sheriff Caniya is a falsified
document resulting from the unlawful intercalations made thereon, calculated to change the import
and meaning of said certificate; and contains untruthful statements of facts. A certificate of posting is
however not a statutory requirement and as such, is not considered indispensable for the validity of
a foreclosure sale under Act 3135 (see Bohanan vs. Court of Appeals, 256 SCRA 355)

"Again, We accord a presumption of regularity in the conduct of the raffle whereby publication of the
Notice of Sale was awarded to the Record Newsweekly.

"As to the erroneous designation of Guimaras Agricultural Development, Inc. as a mortgagor as well
as the mistakes in the technical description of the subject property, both appearing in the Notice of
Sale, We find these immaterial errors and mistakes which do not affect the sufficiency of the Notice
(Olizon vs. Court of Appeals, supra.) xxx "21

We refuse to disturb the factual findings of the lower courts. The notice of the extra-judicial
foreclosure sale was duly published and posted, and clerical errors therein are not sufficient to
invalidate the notice and nullify the sale.

We are left with the issue on the legal propriety of the venue of the extra-judicial foreclosure sale
which we deem proper for determination.
In ascertaining whether or not the venue of the extra-judicial foreclosure sale was improperly laid, it
is imperative to consult Act No. 3135, as amended, the law applicable to such a sale. Act 3135 22 

provides, insofar as pertinent, as follows:

"SECTION 1. When a sale is made under a special power inserted in or attached to any real estate
mortgage hereafter made as security for the payment of money or the fulfillment of any other
obligation, the provisions of the following sections shall govern as to the manner in which the sale
and redemption shall be effected, whether or not provision for the same is made in the power.

SEC. 2. Said sale cannot be made legally outside of the province which the property sold is situated;
and in case the place within said province in which the sale is to be made is the subject of
stipulation, such sale shall be made in said place or in the municipal building of the municipality in
which the property or part thereof is situated."

Thus, the extra-judicial foreclosure sale cannot be held outside the province where the property is
situated. Should a place within the province be a subject of stipulation, the sale shall be held at the
stipulated place or in the municipal building of the municipality where the property or part thereof is
situated.

In the case at bar, the Real Estate Mortgage contract contains the following stipulation on the venue
of the auction sale, viz:

"ARTICLE XX
VENUE OF AUCTION SALE

It is hereby agreed that in case of foreclosure of this mortgage under Act 3135, as amended, and
Presidential Decree No. 385, the auction sale shall be held at the capital of the province, if the
property is within the territorial jurisdiction of the province concerned, or shall be held in the city, if
the property is within the territorial jurisdiction of the city concerned."
23

The foreclosed property is located in Dasmarinas, a municipality in Cavite. Dasmarinas is within the
territorial jurisdiction of the province of Cavite, but not within that of the provincial capital, Trece
Martires City, nor of any other city in Cavite. The territorial jurisdiction of Dasmarinas is covered by
the RTC of Imus, another municipality in Cavite.
24 

The petitioner contends that the extra-judicial foreclosure sale should have been held in Trece
Martires City, the capital of Cavite, following the above-quoted stipulation in the real estate mortgage
contract; or, in the alternative, Section 2 of Act 3135 should have been applied, and the sale
conducted at the municipal building of Dasmarinas where the property is situated. On the other
25 

hand, the private respondent argues that the extra-judicial foreclosure sale was properly held at the
main entrance of the Office of the Clerk of Court and Ex-officio Sheriff of the RTC of Imus which has
territorial jurisdiction over Dasmarinas, as provided in the Supreme Court Administrative Order No. 7
(1983) issued pursuant to Section 18 of B.P. Blg. 129. The private respondent further contends that
26 

Section 18 of B.P. Blg. 129 repealed the provision on venue under Section 2 of Act 3135.

We agree with the petitioner that under the terms of the contract, the extra-judicial foreclosure sale
could be held at Trece Martires, the capital of the province which has territorial jurisdiction over the
foreclosed property. The stipulation of the parties in the real estate mortgage contract is clear, and
therefore, should be respected absent any showing that such stipulation is contrary to law, morals,
good customs, public policy or public order. A contract is the law between the parties. However,
27 

since the stipulation of the parties lack qualifying or restrictive words to indicate the exclusivity of the
agreed forum, the stipulated place is considered only as an additional, not a limiting
venue. Therefore, the stipulated venue and that provided under Act 3135 can be applied
28 

alternatively. Now, applying Act 3135, the venue of the sale should be at the municipal building of
Dasmarinas since the foreclosed property is located in the municipality of Dasmarinas.

We cannot sustain the contention of the private respondent that the proper venue for the sale of the
Dasmarinas property is the RTC of Imus which has territorial jurisdiction thereon as provided under
SC Administrative Order No. 7 issued pursuant to Section 18 of B.P. Blg. 129, which allegedly
repealed the venue provision under Section 2 of Act 3135.

Section 18 of B.P. Blg. 129 provides for the power of the Supreme Court to define the territorial
29 

jurisdiction of the Regional Trial Courts. Pursuant thereto, the Supreme Court issued Administrative
Order No. 7 , placing the municipalities of Imus, Dasmarinas and Kawit within the territorial
30 

jurisdiction of the RTC of Imus. On the other hand, Section 2 of Act 3135 refers to the venue of an
31 

extra-judicial foreclosure sale. 32

It is difficult to fathom how a general law such as B.P. Blg. 129 can repeal a special law like Act
3135. Aside from involving two entirely different legal concepts such as jurisdiction (B.P. Blg. 129)
and venue (Section 2 of Act 3135), this proposition goes against a basic rule in statutory
33 

construction that the enactment of a later legislation which is a general law cannot be construed to
have repealed a special law. Much less can the private respondent invoke Supreme Court
34 

administrative issuances as having amended or repealed Section 2 of Act 3135. A statute is

35 

superior to an administrative issuance, and the former cannot be repealed or amended by the latter. 36

Notwithstanding the foregoing, however, this Court finds the extra-judicial foreclosure sale held at
the RTC of Imus to be valid and legal.

Well-known is the basic legal principle that venue is waivable. Failure of any party to object to the
impropriety of venue is deemed a waiver of his right to do so. In the case at bar, we find that such
waiver was exercised by the petitioner.

An extra-judicial foreclosure sale is an action in rem, and thus requires only notice by publication and
posting to bind the parties interested in the foreclosed property. No personal notice is necessary. As
such, the due publication and posting of the extra-judicial foreclosure sale of the Dasmarinas
property binds the petitioner, and failure of the latter to object to the venue of the sale constitutes
waiver.

In the testimony of the President of LANGKAAN, Alfredo Concepcion, the latter admitted that he was
informed sometime in 1986 by GUIMARAS President Antonio Barredo about the foreclosure sale of
the Dasmarinas property held on August 6, 1986, viz:

"COURT:

Q: ATTORNEY CONCEPCION, YOU SAID THAT YOU CAME TO KNOW THAT THE PROPERTY
OF YOUR CORPORATION WAS SOLD BY COCONUT PLANTERS BANK ONLY IN 1989?

A: At or about the date when Atty. Loyola made that written offer to the bank.

Q: IN THE YEAR 1989 OR PRIOR TO THAT DATE …

ATTY. LOYOLA:
I think 1986, Your Honor.

COURT:

1986 WHEN HE LEARNED ABOUT THE SALE?

ATTY. LOYOLA:

Yes, Your Honor.

x x x           x x x          x x x

ATTY CATUBAY:

x x x           x x x          x x x

Q: So you talked to Ex-Justice Barredo?

A: I did.

Q: And of course he informed you about the proposal that took place on August 6, 1986?

A: He told me that he is aware.

Q: And you were also aware of the Certificate of Sale executed by the Sheriff, isn't it? (sic)

A: At that point there was a foreclosure sale and that it was the mortgagee bank that was the highest
bidder.

Q: After you were informed there was a foreclosure sale, you did not do anything about it, isn't it?
(sic)

A: Well, at that point when I was so informed, I did not take any step yet but on the first opportunity, I
consulted Atty. Loyola. 1âwphi1

Q: And that was in 1986 also?

A: 1986, correct." 37

From 1986 to April 1989, despite knowledge of the foreclosure sale of their property, the President of
petitioner LANGKAAN did not take any step to question the propriety of the venue of the sale. It was
only on May 30, 1989 that the petitioner filed a Complaint for Annulment of the foreclosure sale, and
only after its offer to repurchase the foreclosed property, the title to which had been consolidated in
the name of private respondent UCPB, had been rejected by the bank.

In the letter denominated as "Offer to Reacquire by Langkaan Realty Development, Inc. Without
Prejudice", petitioner LANGKAAN, through its counsel Atty. Franco L. Loyola, who is likewise the
petitioner's counsel in this case, acknowledged that the title to the property "then registered" under
the name of LANGKAAN has been consolidated under the name of UCPB, which was the highest
bidder in the extra-judicial foreclosure sale conducted by the sheriff. Nowhere can it be found that
38 
the petitioner objected to or opposed the holding of the sale at the RTC of Imus. By neglecting to do
so, petitioner LANGKAAN is deemed to have waived its right to object to the venue of the sale, and
cannot belatedly raise its objection in this petition filed before us.

WHEREFORE, premises considered, the petition is hereby DENIED.

G.R. No. 176123               March 10, 2010

JOSE CABARAL TIU, Petitioner,

vs.
FIRST PLYWOOD CORPORATION, Respondent.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 185265

JOSE CABARAL TIU, Petitioner,

vs.
TIMBER EXPORTS, INC., ANGEL DOMINGO, COUNTRY BANKERS INSURANCE
CORPORATION, PERFECTO MONDARTE, JR. and CESAR DACAL, Respondents.

DECISION

CARPIO MORALES, J.:

The following facts spawned the filing of these two consolidated cases:

On January 14, 1990, petitioner Jose Cabral Tiu (petitioner) and First Plywood Corporation (FPC)
entered into an Agreement1 whereby as a settlement of FPC’s indebtedness to petitioner in the
amount of ₱335,513.70, FPC authorized him to cut and haul 958.61 cubic meters of logs within its
timber concession areas in Titay, Zamboanga del Sur and Labason, Zamboanga del Norte.
Petitioner was to sell the logs in the name of FPC and keep the proceeds thereof.
Alleging that FPC, through its general manager Edmund Tansengco (Tansengco), prohibited him
from entering its timber concession areas in contravention of the aforesaid Agreement, petitioner
filed on February 23, 1990 with the Regional Trial Court (RTC) of Pagadian City (Pagadian RTC) a
complaint against FPC and Tansengco for specific performance with preliminary mandatory
injunction and damages.2 The complaint was raffled to Branch 19 and docketed as Civil Case No.
3059 (Pagadian case).

On the basis of a March 22, 1990 Compromise Agreement3 forged by petitioner with FPC,
represented by Tansengco, the Pagadian RTC, by Decision of March 26, 1990,4 rendered a
judgment based on the Compromise Agreement, and subsequently issued a writ of execution upon
motion of petitioner.5

Then Deputy Sheriff Julio G. Tarongoy (Tarongoy) thereupon issued a Notice of Levy and Sale of
Personal Properties dated May 18, 1990, levying upon the personal properties of FPC and
Tansengco consisting mainly of motor vehicles, and publishing notice of the sale thereof at public
auction on May 23, 1990.6

Meanwhile, by Omnibus Motion dated May 7, 1990, FPC prayed for an Order –

a. [D]eclaring that there was no valid service of summons upon complainant FPC, and
allowing it to file an Answer to the Complaint within the reglementary period;

b. [N]ullifying and setting aside the Compromise Agreement dated March 26, 1990 (sic), as
well as the Decision dated March 26, 1990 issued in approval thereof;

c. [N]ullifying and setting aside the Writ of Execution dated April 17, 1990; and

d. [O]rdering the Sheriff to desist from enforcing the [W]rit of [E]xecution pending the
resolution of the motion.7 (underscoring supplied)

The auction sale pushed through just the same, as scheduled on May 23, 1990 following which,
petitioner, who was the highest bidder thereat, was issued a Certificate of Sale.8

The Pagadian RTC later denied FPC’s Omnibus Motion by Order of June 11, 1990.9

G.R. No. 176123

FPC thereupon filed on November 26, 1991 with the Regional Trial Court of Manila (Manila RTC) a
complaint against petitioner and sheriff Tarongoy for annulment of execution sale with damages,
praying for the nullification of the Pagadian case execution sale, the return of the personal properties
purchased by petitioner, and for damages.10

FPC argued mainly that the execution sale was held without complying with then Section 1811 (now
Section 15), Rule 39 of the Rules of Court requiring a minimum of five days prior notice. The
complaint was raffled to Branch 32 and docketed as Civil Case No. 91-59404.

Petitioner and Tarongoy12 alleged, in their Answer, that FPC had in fact attempted to prevent the
Pagadian case execution sale by causing its counsel to file a third-party claim on behalf of
respondent Timber Exports, Inc. (TEI) at the originally scheduled sale on May 18, 1990, implying
that FPC was, contrary to its claim, properly notified.
By Decision of July 16, 2001, the Manila RTC ruled in favor of FPC, disposing thus:

WHEREFORE, JUDGMENT is hereby rendered in favor of the plaintiff corporation, FIRST

PLYWOOD CORPORATION, ORDERING defendants JULIO G. TARONGOY and JOSE CABARAL
TIU jointly and severally:

1. But first, annulling and nullifying the Execution Sale conducted on May 23, 1990 described
in the Certificate of Sale issued May 23, 1990 (Exhibit C);

2. Ordering defendant JOSE CABARAL TIU to return to the plaintiff corporation the
equipment and items, mostly vehicles and trucks acquired by him by virtue and in
consequence of the aforesaid sale or to pay to plaintiff company, jointly and solidarily, the
value of the motor vehicles, trucks, crankshaft, and propeller shaft described and listed in
par. 8 (Complaint);

3. Ordering defendants, jointly and solidarily, to indemnify plaintiff as damages for having

deprived (sic) of the possession and use of the aforedescribed properties, equipment and
items, in the amounts for each as averred in par. 2 (a), (b), (c) and (d) of Complaint;

4. Ordering defendants, jointly and solidarily, to pay plaintiff ₱150,000 by way of attorney’s
fees, and costs.13 (underscoring supplied)

In finding for FPC, the Manila RTC held that no notice of sale of personal property on execution was
posted in three public places not less than five days prior to the Pagadian case execution sale held
on May 23, 1990, resulting in its nullity.14

On FPC’s motion, the Manila RTC issued a writ of execution on May 22, 2006,15 prompting Sheriff
Salvador Dacumos to issue a notice of levy on execution on May 25, 200616 upon the real properties
of petitioner located in Pagadian City.

Petitioner challenged the Manila RTC Decision via a petition for annulment of judgment17 before the
Court of Appeals in Cagayan de Oro City which forwarded the same to the Court of Appeals, Manila
for appropriate action.18

The appellate court dismissed the petition outright by Resolution of August 23, 2006,19 holding that
petitioner was not able to establish his claim of extrinsic or collateral fraud, which refers to any
fraudulent act of the prevailing party committed outside of the trial whereby the unsuccessful party
has been prevented from exhibiting his case fully;20 and that having participated in the proceedings
before the Manila RTC in which he claimed the amount of ₱73,739 representing the remaining
balance (which was not realized from the Pagadian case execution sale), attorney’s fees of ₱50,000
and expenses of litigation, petitioner was estopped from assailing the jurisdiction of the Manila
RTC.21

His motion for reconsideration having been denied by Resolution dated December 5,
2006,22 petitioner comes before this Court through the present Petition for Review on
Certiorari23 bearing G.R. No. 176123.

Petitioner argues that, among other things, estoppel does not lie against him as the issue of lack of
jurisdiction was raised in the Manila RTC through his pleading styled as a Comment on the
Pleadings Relative to the Other Civil Cases Filed by Plaintiff Before Other Courts.
FPC maintains, on the other hand,24 that a separate action to annul an execution sale which did not
comply with the notice requirements is allowed; and that petitioner’s petition for annulment of
judgment filed with the appellate court was fatally defective, it not having explained how the ordinary
remedies of new trial, appeal and petition for relief from judgment were no longer available through
no fault of his.

G.R. No. 185265

In the meantime, in January 1991, respondents TEI and Angel Domingo (Domingo), claiming to be
the owners of some of the personal properties purchased by petitioner at the Pagadian case
execution sale, filed a complaint for annulment of execution sale with damages against petitioner,
Sheriff Tarongoy and Country Bankers Insurance Corporation (CBIC) with the RTC of Antipolo City
(Antipolo RTC). The complaint was later amended to implead as plaintiffs William Tiosic, Francisco
Tansengco, Rafael Tansengco, Guillermo Tansengco, Ma. Angeli Tansengco, Reuben Asuncion,
Ma. Teresa San Agustin and Alvin Sebastian, alleged stockholders of TEI.25

The plaintiffs in the Antipolo RTC case prayed for the nullification of the sale at the Pagadian case
execution sale of the properties which they claimed to belong to them, and the return to them of
those properties. The complaint was raffled to Branch 74 and docketed as Civil Case No. 90-1867.

CBIC was impleaded as a defendant allegedly on account of its issuance of the bond filed by
petitioner in favor of TEI and Domingo who had filed third-party claims on the properties sold at the
Pagadian case execution sale.26

For their part, petitioner and Tarongoy contended that TEI and its alleged successors-in-interest/co-
plaintiffs had no legal capacity to sue as TEI’s corporate existence had expired; and that the
properties in dispute belonged to FPC at the time of the levy.27

CBIC, on the other hand, denied having issued the alleged bond, claiming that the same was not
even in the prescribed legal form.28 It also filed a cross-claim against petitioner and a third-party
complaint against Perfecto Mondarte, Jr. (Mondarte) and Cesar Dacal (Dacal), petitioner’s co-
signers in an indemnity agreement wherein they made a joint and several undertaking to reimburse it
for whatever amount it may be held liable to pay pursuant to the bond.29

The Antipolo RTC dismissed respondents TEI and Domingo’s complaint as well as the counterclaim,
cross-claim and third-party complaint by Decision of September 19, 2005.30 It found that while the
therein plaintiffs had satisfactorily proven ownership of the questioned properties, TEI and FPC were
essentially one and the same entity, it appearing that a majority of the directors and officers of TEI
were also directors and officers of FPC; that the plaintiffs’ witness, Tansengco, admitted being the
Chairman of the Board and Chief Executive Officer of both TEI and FPC; and that FPC cannot be
allowed to hide behind TEI to defraud its creditors and work an injustice.

Respondents TEI and Domingo31 appealed to the CA.

By Decision of November 16, 2007,32 the appellate court reversed the Antipolo RTC Decision, finding
that the doctrine of piercing the veil of corporate fiction was incorrectly applied, there being no
showing that TEI and Domingo had control over FPC and used it to commit fraud or any dishonest
and unjust act; and that as found by the Antipolo RTC, TEI and Domingo sufficiently proved their
ownership of the questioned properties.
The appellate court thus ordered herein petitioner to pay TEI and Domingo temperate damages for
the questioned properties with legal interest; held CBIC solidarily liable with petitioner to the extent of
the amount indicated in the surety bond which was determined to have been regularly issued; and
declared petitioner, Mondarte and Dacal solidarily liable to reimburse CBIC pursuant to the
indemnity agreement they co-signed, without prejudice to Mondarte and Dacal’s right of
reimbursement against petitioner.

Petitioner’s Motion for Reconsideration having been denied by Resolution dated November 6,
2008,33 he filed the Petition for Review on Certiorari34 docketed as G.R. No. 185265.

Petitioner posits that, among other things, TEI had no personality to file the complaint with the
Antipolo RTC, its corporate life having expired before such filing; that neither did TEI’s supposed
stockholders have any personality to file the amended complaint as there was no prior conveyance
to them of the properties being claimed by TEI; that the invoices and bills of lading presented by TEI
and Domingo as evidence were devoid of any particulars to prove that the properties referred to
therein were the same ones levied upon in the Pagadian case; and that the appellate court’s
pronouncements on indemnity in favor of CBIC and right of reimbursement in favor of Mondarte and
Dacal were erroneous since they did not appeal from the Antipolo RTC Decision.

TEI and Domingo, in their Comment,35 contend that the factual questions raised by petitioner cannot
be the subject of a petition for review; that the stockholders of TEI had the personality to file the
complaint with the Antipolo RTC as successors-in-interest and beneficial owners of TEI’s assets,
without need for any deed of conveyance; that the doctrine of piercing the corporate veil does not
apply as there was no wrongdoing for which the veil was used as a shield; and that they have
sufficiently proven their ownership of the questioned properties as found by the trial court and
affirmed by the appellate court.

CBIC, in turn, avers that the grant of its cross-claim against petitioner and third-party complaint
against Mondarte and Dacal was proper as it was impleaded as an appellee before the appellate
court.36

On petitioner’s motion, the Court, by Resolution of March 11, 2009,37 consolidated G.R. No. 185265
with G.R. No. 176123 since both petitions sprang from the Pagadian case and essentially involve the
same issue of validity of the execution sale.

Both petitions are meritorious.

The key to resolving the petitions lies in the validity of the Pagadian case execution sale.

The presumption of regularity in the performance of official function here applies. Conformably, any
party alleging irregularities vitiating an auction sale must come forward with clear and convincing
proof.38

In G.R. No. 176123, FPC has not discharged its burden of proof. Apart from its bare allegations, it
has not come forward with any evidence, let alone a clear and convincing one, of non-compliance
with the requirement of a minimum of five days prior notice of sale of property on execution. Hence,
in the absence of contrary evidence, the presumption prevails that the sheriff performed his official
duty of posting the notices of sale within the reglementary period.39 In finding otherwise, the Manila
RTC placed the burden of proof on the sheriff without jurisprudential basis.
The Court finds that petitioner properly availed of the remedy of a petition for annulment of judgment
in challenging the Manila RTC Decision. In his petition with the appellate court, he did not limit his
ground to extrinsic fraud, as he invoked as well the Manila RTC’s lack of jurisdiction to annul the
proceedings in the Pagadian RTC which is a court of co-equal and coordinate jurisdiction.

Since petitioner’s petition raised lack of jurisdiction, he did not have to allege that the ordinary
remedies of new trial, reconsideration or appeal were no longer available through no fault of his. This
is so because a judgment rendered or final order issued by the RTC without jurisdiction is null and
void and may be assailed any time either collaterally or in a direct action, or by resisting such
judgment or final order in any action or proceeding whenever it is invoked.40 1avvphi1

Verily, the Manila RTC lacked jurisdiction over the nature of the action filed by FPC. The Pagadian
RTC which rendered the decision and ordered the execution sale should settle the whole
controversy.41 Pursuant to the principle of judicial stability, the judgment or order of a court of
competent jurisdiction, Pagadian RTC in this case, may not be interfered with by any court of
concurrent jurisdiction (i.e., another RTC), for the simple reason that the power to open, modify or
vacate the said judgment or order is not only possessed by but is restricted to the court in which the
judgment or order is rendered or issued.42

Resultantly, the Manila RTC Decision of July 16, 2001 is void for lack of jurisdiction. As such, it, as
well as all subsequent orders proceeding therefrom, should have been annulled by the appellate
court.

A judgment rendered by a court without jurisdiction is null and void and may be attacked anytime. It
creates no rights and produces no effect. It remains a basic fact in law that the choice of the proper
forum is crucial, as the decision of a court or tribunal without jurisdiction is a total nullity. A void
judgment for want of jurisdiction is no judgment at all. All acts performed pursuant to it and all claims
emanating from it have no legal effect.43

Respecting G.R. No. 185265, the Court finds that the action lodged with the Antipolo RTC was
essentially the same as that filed with the Manila RTC. The relief sought was also the annulment of
the Pagadian case execution sale. Hence, the Antipolo RTC was similarly bereft of jurisdiction over
the nature of the action. This should have been its basis for dismissing the complaint.

The various branches of the RTC, having as they do have the same or equal authority and
exercising as they do concurrent and coordinate jurisdiction, should not, cannot and are not
permitted to intervene with their respective cases, much less with their orders or judgments.44 A
contrary rule would lead to confusion and seriously hamper the administration of justice.45

The Court sees through the ruse being peddled by FPC.

More than a year after it failed to obtain a reversal of the judgment based on compromise agreement
in the Pagadian case, and long after the conclusion of the execution sale pursuant thereto, FPC
sought to alter the adverse results of the Pagadian RTC final and executory Decision by filing a
complaint for annulment of the Pagadian execution sale with damages with the Manila RTC – a court
of concurrent and coordinate jurisdiction.

FPC had also previously caused a defunct sister company, TEI, and its so-called "stockholders" to
lodge another complaint for annulment of the same Pagadian case execution sale with
damages with the Antipolo RTC – another court of concurrent and coordinate jurisdiction as the
Pagadian RTC.
This Court would be the last to sanction such a brazen abuse of remedies and disrespect of judicial
stability. What is clear is that FPC is feebly attempting to disturb the effects of a judgment that, by its
failure to appeal, had long become final and been the subject of execution. This cannot be allowed
without running afoul of the settled doctrine of finality of judgment.

Once a judgment attains finality, it becomes immutable and unalterable. A final and executory
judgment may no longer be modified in any respect, even if the modification is meant to correct what
is perceived to be an erroneous conclusion of fact or law, and regardless of whether the modification
is attempted to be made by the court rendering it or by the highest court of the land.46

Litigation must end and terminate sometime and somewhere, and it is essential to an effective
administration of justice that once a judgment has become final, the issue or cause involved therein
should be laid to rest.47 Utmost respect and adherence to this principle must always be maintained
by those who wield the power of adjudication. Any act which violates it must be struck down.48

WHEREFORE, the petitions are GRANTED.

In G.R. No. 176123, the challenged August 23, 2006 Resolution of the Court of Appeals dismissing
petitioner’s petition is SET ASIDE. The Manila RTC Decision of July 16, 2001 in Civil Case No. 91-
59404 is DECLARED null and void.

In G.R. No. 185265, the November 16, 2007 Decision of the Court of Appeals which reversed the
decision of the Antipolo RTC is SET ASIDE. The September 19, 2005 Decision of the Antipolo RTC
in Civil Case No. 90-1867 dismissing the complaint is REINSTATED but on a different ground —
lack of jurisdiction.

SO ORDERED.

G.R. No. 193108               December 10, 2014

MARILYN VICTORIO-AQUINO, Petitioner,
vs.
PACIFIC PLANS, INC. and MAMERTO A. MARCELO, JR. (Court-Appointed Rehabilitation
Receiver of Pacific Plans, Inc.), Respondents.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
which seeks to annul and set aside the Decision  of the Special First Division of the Court of Appeals
1

(CA), dated February 26, 2010, and its Resolution  dated July 21, 2010 denying petitioner's Motion
2

for Reconsideration in the case entitled Marilyn Victoria-Aquino v. Pacific Plans, Inc. and Mamerto A.
Marcelo, Jr., docketed as CA-G.R. SP No. 105237.
Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation or
"APEC")  is engaged in the business of selling pre-need plans and educational plans, including
3

traditional open-ended educational plans (PEPTrads). PEPTrads are educational plans where
respondent guarantees to pay the planholder, without regard to the actual cost at the time of
enrolment, the full amount of tuition and other school fees of a designated beneficiary.  Petitioner is a
4

holder of two (2) units of respondent’s PEPTrads. 5

On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing planholders as
they fall due, respondent filed a Petition for Corporate Rehabilitation with the Regional Trial Court
(Rehabilitation Court), praying that it be placed under rehabilitation and suspension of payments
pursuant to Presidential Decree (P.D.) No. 902-A, as amended, in relation to the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules).  At the time of filing of the Petition for
6

Corporate Rehabilitation, respondent had more or less thirty four thousand (34,000) outstanding
PEPTrads. 7

On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the suspension of
payments of the obligations of respondent and ordering all creditors and interested parties to file
their comments/oppositions, respectively, to the Petition for Corporate Rehabilitation.  The same
8

Order also appointed respondent Mamerto A. Marcelo (Rehabilitation Receiver) as the rehabilitation
receiver and set the initial hearing of the case on May 25, 2005. 9

Pursuant to the prevailing rules on corporate rehabilitation, respondent submitted to the

Rehabilitation Court its proposed rehabilitation plan. Under the terms thereof, respondent proposed
the implementation of a "Swap,"  which will essentially give the planholder a means to exit from the
10

PEPTrads at terms and conditions relative to a termination value that is more advantageous than
those provided under the educational plan in case of voluntary termination. 11

On February 16, 2006, the Rehabilitation Receiver submitted an Alternative Rehabilitation Plan
(ARP) for the approval of the Rehabilitation Court. Under the ARP, the benefits under the PEP Trads
shall be translated into fixed-value benefits as of December 31, 2004, which will be termed as Base
Year-end 2004 Entitlement, and shall be computed as follows: (i) for availing plan holders, based on
fifty-percent (50%) of Average School Fee of SY 2005-2006 for every remaining year of availment;
(ii) for nonavailing (Group 1) plan holders,  based on the higher of Base Year-end 2004 Entitlement
12

under the Rehabilitation Proposal or fifty-percent (50%) of Average School Fee of SY 2005-2006 for
every year of availment; and (iii) for non-availing (Group 2) plan holders,  based on the planholders’
13

contributions with seven percent (7%) net interest per annum from date of full payment on record to
December 31, 2004.  The Base Year-end Entitlement will be covered by a Rehabilitation Plan
14

Agreement in lieu of a fixed-value plan. 15

For petitioner, she is entitled toreceive an aggregate amount consisting of: (a) the value of her total
contributions plus interest at the rate of seven percent (7%) from the date of full payment until
December 31, 2005 (Net Translated Value); and (b) interest on the Net Translated Value at the
annual rate of seven percent (7%) from January 1, 2006 until 2010. 16

The ARP also provided for tuition support for each enrolment period until SY 2009-2010 depending
on the prevailing market rate of the NAPOCOR Bonds and Peso-Dollar exchange rate.  The tuition 17

support is computed as the lesser of the remaining balance of Base Year-end 2004 Entitlement, the
last-term tuition or reimbursement on record and the following tuition support ceiling:

Availment Mode Ceiling (in Php)

Annual ₱20,000.00
 Semester ₱10,000.00
Trimester ₱6,000.00 18

These tuition support payments are considered advances from the Base Year-end 2004
Entitlement.19

As to the funding for the tuition support, the same shall be sourced from either two (2) ways:

(1) Outright sale of the NAPOCOR bonds and conversion of Dollar proceeds to Peso, up to the
equivalent of the tuition support requirements. The payment of the tuition support will be dependent
on the terms and exchange rate under which the bonds are liquidated; or

(2) Forward sale of the underlying Dollars to a financial institution, which then issues notes credit
linked with NAPOCOR Bonds. The notes can then be sold to interested financial institution to
provide for liquidity to fund the requirements for tuition support. 20

The creditors/oppositors did not oppose/comment on the Rehabilitation Receiver’s ARP, although
the Parents Enabling Parents Coalition, Inc. (PEPCI) filed with the CA, a Petition for Certiorari with
Application for a TRO/Writ of Preliminary Injunction dated February 10, 2006. As no TRO/Writ of
Preliminary Injunction has been issued against the conduct of further proceedings, on April 27, 2006,
the Court issued a Decision  approving the ARP, which cradled several appeals filed with the CA,
21

and later on, to this Court that are still pending resolution.22

Nevertheless, respondent commenced with the implementation of its ARP in coordination with, and
with clearance from, the Rehabilitation Receiver. 23

In the meantime, the value of the Philippine Peso strengthened and appreciated. In view of this
development, and considering that the trust fund of respondent is mainly composed of NAPOCOR
bonds that are denominated in US Dollars, respondent submitted a manifestation with the
Rehabilitation Court on February 29, 2008, stating that the continued appreciation of the Philippine
Peso has grossly affected the value of the U.S. Dollar-denominated NAPOCOR bonds, which stood
as security for the payment of the Net TranslatedValues of the PEPTrads. 24

Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to Admit dated March 7,
2008, echoing the earlier tenor and substance of respondent’s manifestation, and praying that the
Modified Rehabilitation Plan (MRP) be approved by the Rehabilitation Court. Under the MRP, the
ARP previously approved by the Rehabilitation Court is modified as follows: (a) suspension of the
tuition support; (b) converting the Philippine Peso liabilities to U.S. Dollar liabilities by assigning to
each planholder a share of the remaining asset in proportion to the share of liabilities in 2010; and
(c) payments of the trust fund assets in U.S. Dollars at maturity. 25

After the submission of comments/opposition by the concerned parties, the Rehabilitation Court
issued a Resolution  dated July 28, 2008 approving the MRP. In approving the same, the
26

Rehabilitation Court reasoned that in view of the "cram down" power of the rehabilitation court under
Section 23 of the Interim Rules, courts have the power to approve a rehabilitation plan over the
objection of creditors and even when such proposed rehabilitation plan involvesthe impairment of
contractual obligations. 27
Petitioner questioned the approval of the MRP before the CA on September 26, 2008. It likewise
prayed for the issuance of a TRO and a writ of preliminary injunction to stay the execution of the
Resolution dated July 28, 2008. 28

In dismissing or denying the Petition for Review, the CA held that: (a) petitioner did not pay the
proper amount of docket fees; (b) a Petition for Review under Rule 43 is an improper remedy to
question the approval of a modified rehabilitation plan; (c) contrary to petitioner’s claim, the
alterations in the MRP are consistent with the goalsof the ARP; and (d) the approval of the MRP did
not amount to an impairment of the contract between petitioner and respondent. The falloof the
assailed Decision  states:
29

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DENYING or

DISMISSING the petition for review filed in this case and AFFIRMING the corporate rehabilitation
Court’s Resolution dated July 28, 2008 in Special Proceeding No. M-6059.  Unfortunately for
30

petitioner, despite its motion for reconsideration, the CA denied the same on July 21, 2010. 31

Hence, this Petition for Review on Certiorariraising the following grounds:

The Court of Appeals rendered a decision contrary to law and not in accord with the applicable
decisions of the Supreme Court when it sustained the Rehabilitation Court’s approval of the Modified
Rehabilitation Plan.

II

The Court of Appeals rendered a decision contrary to law when it ruled that a Petition for Review
was an improper remedy to question a final order of the Rehabilitation Court approving the Modified
Rehabilitation Plan.

III

The Court of Appeals rendered a decision not in accord with the issuances of the Supreme Court
and the usual course of judicial proceedings when it declared that Petitioner had not paid the proper
amount of filing and docket fees, despite the fact that, as clearly shown in the receipts presented by
petitioner, the proper amount of filing fees were paid. 32

In its Comment dated October 23, 2006, respondent raised various procedural infirmities on the
petition warranting its dismissal, to wit: (1) the assailed decision has become final and executory for
failure of petitioner to timely serve a copy of the Petition for Time upon the CA in violation of Section
3, Rule 45 of the Rules of Court; (2) petitioner’s motion for reconsideration on the questioned
decision raises no new arguments; thus, is merely pro formaand did not toll the running of the
reglementary period; (3) a petition for review under Rule 43 of the Rules of Court is an improper
mode to question the MRP; and (4) petitioner failed to pay the appropriate amount of docket fees
when she filed the Petition for Review with the CA. 33

On procedural grounds, this Court finds for the petitioner.

First. Respondent asseverates that the CA correctly held that the Petition for Review under Rule 43
of the Rules of Court is an improper mode to question the Resolution approving the MRP, since the
same constitutes merely as an interlocutory order and, therefore, a proper subject of a certiorari
case under Rule 65 of the Rules of Court. On the other hand, petitioner counters that such
Resolution isa final order with respect to the approval of the MRP; hence, her recourse to a Petition
for Review under Rule 43 of the Rules of Court was proper. Petitioner further argues that such
remedy is clearly in line with the directive of AM No. 04-9-07-SC,  which took effect on October 15,
34

2004 and, therefore, was the correct rule on appeals prevailing at the time petitioner filed her petition
with the CA.35

Petitioner’s contention is impressed with merit.

It bears emphasis that the governing rule at the time respondent filed its petition for rehabilitation
was the Interim Rules, which does not expressly state the mode of appeal from the decisions, orders
and resolutions of the Rehabilitation Court, either prior or after the approval of the rehabilitation plan.
Accordingly, this Court issued a Resolution, A.M. No. 04-9-07-SC,  which lays down the proper
36

mode of appeal in cases involving corporate rehabilitation and intra-corporate controversies in order
to prevent cluttering the dockets of the courts with appeals and/or petitions for certiorari. The first
paragraph thereof provides:

1. All decisions and final orders in cases falling under the Interim Rules of Corporate Rehabilitation
and the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No.
8799 shall be appealable to the Court of Appeals through a petition for review under Rule 43 of the
Rules of Court. 37

Under the said Resolution, all decisions and final orders of the rehabilitation court, regardless of
whether they are issued before or after the approval of the rehabilitation court, shall be brought on
appeal to the CA via a petition for review under Rule 43 of the Rules of Court.

Subsequently, the Supreme Court issued A.M. No. 00-8-10-SC  (Rehabilitation Rules), which took
38

effect on January 16, 2009, embodying the rehabilitation rules applicable to petitions for
rehabilitation of corporations, partnerships and associations pursuant to P.D. No. 902-A, as
amended. Section 1, Rule 8 thereof unequivocally states:

SEC. 1. Motion for Reconsideration. — A party may file a motion for reconsideration of any order
issuedby the court prior to the approval of the rehabilitation plan. No relief can be extended to the
party aggrieved by the court’s order on the motion through a special civil action for certiorari under
Rule 65 of the Rules of Court. Such order can only be elevated to the Court of Appeals as an
assigned error in the petition for review of the decision or order approving or disapproving the
rehabilitation plan.

An order issued after the approval of the rehabilitation plan can be reviewed only through a special
civil action for certiorari under Rule 65 of the Rules of Court.
39

While We agree with respondent that the later rule states that orders issued after the approval of the
rehabilitation plan can be reviewed only through a special civil action for certiorari under Rule 65 of
the Rules of Court, such rule does not apply to the instant case as the same was not yet in effect at
the time petitioner filed her Petition for Review with the CA. Stated otherwise, the prevailing law at
the time petitioner filed said petition with the CA is the Interim Rules as well as A.M. No. 04-9-07-SC.
As such, the proper remedy of appeal from all decisions and final orders of the RTC was Rule 43 of
the Rules of Court, and not Rule 65 thereof.

In any case, We cannot also subscribe to respondent’s view that the approval of the MRP is merely
an interlocutory order. In Alma Jose v. Javellana,  We have already defined a final order as one that
40

puts an end to the particular matter involved, or settles definitely the matter therein disposed of, as to
leave nothing for the trial court to do other than to execute the order.  Here, it cannot be gainsaid
41

that the Resolution approving the MRP is a final order with respect to the validity thereof, specifically
on the following issues: (1) the suspension of the tuition support; (2) conversion of Philippine Peso
entitlements to U.S. Dollar entitlements; and (3) the payments in U.S. Dollars upon maturity in 2010.
In this regard, the issue as to its alleged infringement on the non-impairment clause under the
Constitution has likewise been settled. The doctrine laid down in New Frontier Sugar Corp. v.
Regional Trial Court Branch 39, Iloilo City,  cannot be used to counter the foregoing because in that
42

case, the Court merely stressed that an original action for certiorarimay be directed against an
interlocutory order of the lower court prior to an appeal from the judgment; or where there is no
appeal or any plain, speedy or adequate remedy.  New Frontier does not categorically preclude the
43

filing of a petition for review under Rule43 for decisions or orders issued after the approval of the
rehabilitation plan such as a modification thereof.

Second. We find respondent’s contention on the non-payment of the docket fees devoid of merit
because the records rather show that petitioner had, in fact, paid the appropriate amount of docket
fees for her Petition with the CA and her application for a TRO on September 12, 2008. To support
this allegation, petitioner attached copies of official receipts, representing the fees she has paid in
the aggregate amount of Four Thousand Six Hundred Eighty Pesos (₱4,680.00). Third. With respect
to respondent’s allegation that petitioner violated Section 2,  in relation to Section 3,  Rule 45 of the
44 45

Rules of Court, in particular the failure of petitioner to serve a copy ofits petition for time with the CA
within the prescribed period, the same is mislaid.

A careful examination of the records will show that said petition was personally served on the CA on
August 17, 2010, within the prescribed period pursuant to Sections 2 and 3, Rule 45 of the Rules of
Court. This is the most logical explanation since the Manifestation regarding such service, together
with the attached Petition for Time, was filed on August 18, 2010. Thus, the date "August 27, 2010"
on the stamp of the CA is clearly a clerical error and respondent’s assertion that the CA was not
timely served the Petition for Time is erroneous.

Similarly, owing to the significance of the issues raised in the instant case, We rule that any lapse on
the filing of the motion for reconsideration with the CA is not grave enough to dismiss the instant
petition on technical grounds. Moreover, it is settled that although a motion for reconsideration may
merely reiterate issues already passed upon by the court, that, by itself, does not make it pro forma.
In fact, the CA did not declare said motion for reconsideration as pro forma when it denied the same.
Hence, considering that the motion for reconsideration is not pro forma and a mere scrap of paper,
its filing tolled the running period of appeal pursuant to Section 2,  Rule 37 of the Rules of Court.
46

Fourth. Anent the Verification and Certification against Forum Shopping of the instant petition, we
recognize that petitioner failed to comply with Section 6, Rule II of A.M. No. 02-8-13-SC, otherwise
known as the Rules on Notarial Practice of 2004 (Notarial Rules), which provides that in order for a
jurat to be valid, the following requirements should be present:

SEC. 6. Jurat. - "Jurat" refers to an act in which an individual on a single occasion:

(a) appears in person before the notary public and presents an instrument or document;

(b) is personally known to the notary public or identified by the notary public through
competent evidence of identityas defined by these Rules;

(c) signs the instrument ordocument in the presence of the notary; and
 (d) takes an oath or affirmation before the notary public as to such instrument or
document.  as well as Section 12, Rule II of the Notarial Rules, which defines what
47

constitutes competent evidence of identity, to wit –

SEC. 12. Competent Evidence of Identity. - The phrase "competent evidence of identity" refers to the
identification of an individual based on:

(a) at least one current identification document issued by an official agency bearing the
photograph and signature of the individual; or

(b) the oath or affirmation of one credible witness not privy to the instrument, document or
transaction who is personally known to the notary public and who personally knows the
individual, or of two credible witnesses neither of whom is privy to the instrument, document
or transaction who each personally knows the individual and shows to the notary public
documentary identification.

While we agree with the observation of respondent that in the instant Petition, the Verification and
Certification against Forum Shopping attached thereto is defective because the jurat thereof does
not contain the required competent evidence of identity of the affiant, petitioner herein, such
omission may be overlooked in the name of judicial leniency, in order to give this Court an avenue to
dispose of the substantive issues of this case.

As to respondent’s allegation that the instant petition contained a false Certification of Non-Forum
Shopping since the same failed to disclose the pendency of a related petition pending before the CA,
the same warrants scant consideration.

While it would appear that there is substantial identity ofparties, since both petitioner and PEPCI are
creditors of respondent and both are questioning the Rehabilitation Court’s approval of the MRP, the
identity of cause of action is absent in the present case. An assiduous scrutiny of the respondent’s
Petition for Review with the CA and PEPCI’s Petition for Review dated September 3, 2008, also filed
with the CA, will show that they raised different causes of action. In Majority Stockholders of Ruby
Industrial Corporation v. Lim,  we have reiterated that no forum shopping exists when two (2) groups
48

of oppositors in a rehabilitation case act independently of each other, even when they have sought
relief from the same appellate court, thus:

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87.
Thus:

We hold that private respondents are not guilty of forum shopping. In Ramos, Sr. v. Court of
Appeals, we ruled:

"The private respondents can be considered to have engaged in forum shopping if all of them, acting
as one group, filed identical special civil actions in the Court of Appeals and in this Court. There
must be identity of parties or interests represented, rights asserted and relief sought in different
tribunals. In the case at bar, two groups of private respondents appear to have acted independently
of each other when they sought relief from the appellate court. Both groups sought relief from the
same tribunal.

"It would not matter even if there are several divisions in the Court of Appeals. The adverse party
can always ask for the consolidation of the two cases. x xx"
In the case at bar, private respondents represent different groups with different interests - the
minority stockholders' group, represented by private respondent Lim; the unsecured creditors group,
Allied Leasing & Finance Corporation; and the old management group. Each group has distinct
rights to protect. In line with our ruling in Ramos, the cases filed by private respondents should be
consolidated. In fact, BENHAR and RUBY did just that - in their urgent motions filed on December 1,
1993 and December 6, 1993, respectively, they prayed for the consolidation of the cases before the
Court of Appeals. 49

In any case, this Court resolves tocondone any procedural lapse in the interest of substantial justice
given the nature of business of respondent and its overreaching implication to society.To deny this
Court of its duty to resolve the substantive issues would be tantamount to judicial tragedy as
planholders, like petitioner herein, would be placed in a state of limbo as to its remedies under
existing laws and jurisprudence.

Indeed, where strong considerations of substantive justice are manifest in the petition, the strict
application of the rules of procedure may be relaxed, in the exercise of its equity jurisdiction.  Thus,
50

a rigid application of the rules of procedure will not be entertained if it will only obstruct rather than
serve the broader interests of justice in the light of the prevailing circumstances in the case under
consideration.  It is a prerogative duly embedded in jurisprudence, as in Alcantara v. Philippine
51

Commercial and International Bank,  where the Court had the occasion to reiterate that:
52

x x x In appropriate cases, the courts may liberally construe procedural rules in order to meet and
advance the cause of substantial justice. Lapses in the literal observation of a procedural rule will be
overlooked when they do not involve public policy, when they arose from an honest mistake or
unforeseen accident, and when they have not prejudiced the adverse party or deprived the court of
its authority. The aforementioned conditions are present in the case at bar. x x x x

There is ample jurisprudence holding that the subsequent and substantial compliance of an
appellant may call for the relaxation of the rules of procedure. In these cases, weruled that the
subsequent submission of the missing documents with the motion for reconsideration amounts to
substantial compliance. The reasons behind the failure of the petitioners in these two cases to
comply with the required attachments were no longer scrutinized. What we found noteworthy in each
case was the fact that the petitioners therein substantially complied with the formal requirements.
We ordered the remand of the petitions in these cases to the Court of Appeals, stressing the ruling
that by precipitately dismissing the petitions "the appellate court clearly put a premium on
technicalities at the expense of a just resolution of the case."

While it is true that the rules of procedure are intended to promote rather than frustrate the ends of
justice, and the swift unclogging of court docket is a laudable objective, it nevertheless must not be
met at the expense of substantial justice. This Court has time and again reiterated the doctrine that
the rules of procedure are mere tools aimed at facilitating the attainment of justice, rather thanits
frustration. A strict and rigid application of the rules must alwaysbe eschewed when it would subvert
the primary objective of the rules, that is, to enhance fair trials and expedite justice. Technicalities
should never beused to defeat the substantive rights of the other party. Every party-litigant must be
afforded the amplest opportunity for the proper and just determination of his cause, free from the
constraints of technicalities. Considering that there was substantial compliance, a liberal
interpretation of procedural rules in this labor case is more in keeping with the constitutional
mandate to secure social justice. 53

Notwithstanding our liberal interpretation of the rules, the instant petition must fail on substantive
grounds.
Petitioner contends that the MRP is ultra vires insofar as it reduces the original claim and even the
original amount that petitioner was to receive under the ARP.  She also claims that it was beyond
54

the authority of the Rehabilitation Court to sanction a rehabilitation plan, or the modification thereof,
when the essential feature of the plan involves forcing creditors to reduce their claims against
respondent. 55

Petitioner’s argument is misplaced. The "cram-down" power of the Rehabilitation Court has long
been established and even codified under Section 23, Rule 4 of the Interim Rules, to wit: Section 23.
Approval of the Rehabilitation Plan. – The court may approve a rehabilitation plan over the
opposition of creditors, holding a majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable.

Such prerogative was carried over inthe Rehabilitation Rules, which maintains that the court may
approve a rehabilitation plan over the objection of the creditors if, in its judgment, the rehabilitation of
the debtors is feasible and the opposition of the creditors is manifestly unreasonable. The required
number of creditors opposing such plan under the Interim Rules (i.e.,those holding the majority of
the total liabilities of the debtor) was, in fact, removed. Moreover, the criteria for manifest
unreasonableness is spelled out, to wit:

SEC. 11. Approval of Rehabilitation Plan. — The court may approve a rehabilitation plan even over
the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is feasible
and the opposition of the creditors is manifestly unreasonable. The opposition of the creditors is
manifestly unreasonable if the following are present:

(a) The rehabilitation plan complies with the requirements specified in Section 18 of Rule
3;  (b) The rehabilitation plan would provide the objecting class of creditors with payments
56

whose present value projected in the plan would be greater than that which they would have
received if the assets of the debtor were sold by a liquidator within a six (6)month period from
the date of filing of the petition; and

(c) The rehabilitation receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are
not impaired. The court shall also issue the necessary orders or processes for its immediate and
successful implementation. It may impose such terms, conditions, or restrictions as the effective
implementation and monitoring thereof may reasonably require, or for the protection and
preservation of the interests of the creditors should the plan fail. 57

This legal precept is not novel and has, in fact, been reinforced in recent decisions such as in Bank
of the Philippine Islands v. Sarabia Manor Hotel Corporation,  where the Court elucidated the
58

rationale behind Section 23, Rule 4 of the Interim Rules, thus:

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules) states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a majority of the corporation’s total
liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is currently
incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their
own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of
all stakeholders. Otherwise stated, it forces the creditors toaccept the terms and conditions of the
rehabilitation plan, preferring long-term viability over immediate but incomplete recovery. 59
as well as in Pryce Corporation v. China Banking Corporation,  to wit:
60

In any case, the Interim Rules or the rules in effect at the time the petition for corporate rehabilitation
was filed in 2004 adopts the cramdown principle which "consists of two things: (i) approval despite
opposition and (ii) binding effect of the approved plan x x x."

First, the Interim Rules allows the rehabilitation court to "approve a rehabilitation plan even over the
opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable."

Second, it also provides that upon approval by the court, the rehabilitation plan and its provisions
"shall be binding upon the debtor and all persons who may be affected by it, including the creditors,
whether or not such persons have participated inthe proceedings or opposed the plan or whether or
not their claims have been scheduled."

Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final and
executory resulting from the resolution of BPI v. Pryce Corporation docketed as G.R. No. 180316,
binds all creditors including respondent China Banking Corporation. 61

Based on the aforequoted doctrines, petitioner’s outright censure of the concept of the cram-down
power of the rehabilitation court cannot be countenanced. To adhere to the reasoning of petitioner
would be a step backward — a futile attempt to address an outdated set of challenges. It is
undeniable that there is a need to move to a regime of modern restructuring, cram-down and court
supervision in the matter of corporation rehabilitation in order to address the greater interest of the
public. This is clearly manifested in Section 64 of Republic Act (R.A.) No. 10142, otherwise known
as Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the latest law on corporate
rehabilitation and insolvency, thus:

Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the
creditors and stakeholders that the Plan is ready for their examination. Within twenty (2Q) days from
the said notification, the rehabilitation receiver shall convene the creditors, either as a whole or per
class, for purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless
approved by all classes of creditors w hose rights are adversely modified or affected by the Plan. For
purposes of this section,the Plan is deemed tohave been approved by a class of creditors if
members of the said class holding more than fifty percent (50%) of the total claims of the said class
vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of their
respective claims based on the registry of claims submitted by the rehabilitation receiver pursuant to
Section 44 hereof.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation
Plan if all of the following circumstances are present:

(a)The Rehabilitation Plan complies with the requirements specified in this Act;

(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling
interestas a result of the Rehabilitation Plan; and
 (d) The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would have
received if the debtor were under liquidation. 62

While the voice and participation of the creditors is crucial in the determination of the viability of the
rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the interests of all
stakeholders is the ultimate and prime consideration. Thus, while we recognize the predisposition of
the planholders in vacillating on the enforcement of the MRP, since the terms and conditions stated
therein have been fundamentally changed from those stated in the Original and Amended
Rehabilitation Plan, the MRP cannot be considered an abrogation of rights to the
planholders/creditors.

First. An examination of the changes proposed in the MRP would confirm that the same is, in fact,
an effective risk management tool intended to serve both the interests of respondent and its
planholders/creditors.

It is a matter of fact and record that the Philippine Peso unexpectedly and uncharacteristically
strengthened and appreciated from Fifty-Two and 02/100 Pesos (Php52.02) to One U.S. Dollar
(USD1.00) at the time of the approval of the ARP to Forty and (63)/100 Pesos (Php40.63) to One
U.S. Dollar (USD1.00) as of March 7, 2008, the day the Rehabilitation Receiver filed his
Manifestation with Motion to Admit praying for the approval of the MRP.  There is no gainsaying that
63

during this period, the value of the U.S. Dollar-denominated NAPOCOR bonds — the assets
covering the trust fund subject of the traditional education plan — has already been substantially
diluted because of the stronger value of the Philippine Peso vis-à-visthe U.S. Dollar from the time of
the approval of the ARP.  As succinctly held by the RTC in its Resolution dated July 28, 2008, to wit:
64

First, there is in tr[u]th no quibble that the Philippine Peso has behaved in an uncharacteristic
mannerby appreciating significantly vis-àvis the United States Dollar. This fact is not disputed by any
of the parties. Further, the Court takes cognizance that at the time the Alternative Rehabilitation Plan
was approved on 27 April 2006, the exchange rate was Php52.02/US$1.00. As of 15 July 2008, the
exchange rate was Php45.35/US$1.00, or an appreciation of atleast fourteen percent (14%). Since
the NAPOCOR Bonds are denominated in United States dollars, it means that the NAPOCOR
Bonds have losttheir original value by at least fourteen percent (14%) since the approval of the
Alternative Rehabilitation Plan on 27 April 2006. Ergo, the continued payment of tuition support in
Philippine Pesos will lead to the certainty of the trust fund being substantially diluted when the
planholders avail of the same upon maturity of the NAPOCOR Bonds in 2010. 65

This defense mechanism is reasonable because sustaining the current terms of the ARP would
render the trust fund of no value given the high probability of its dilution. Resultantly, the very
foundation of the rehabilitation plan, which is to minimize the loss of all stakeholders, would be
rendered in futile since the trust funds may no longer be sufficient to meet the basic terms of the
ARP.

In addition, the MRP merely establishes the planholders’ claim on a percentage/pro rata share of the
assets of the trust fund. It does not, in any way, diminish the value of their claims or their share in the
proverbial pie. The propriety of this theory was recognized by the Rehabilitation Court, to wit:

Second, the conversion of the Philippine Peso entitlements into United States Dollar entitlements
would not diminish the pro rata share of the planholders. Each planholder would still receive his
proportionate share of the pie, so to speak, albeitin United States Dollars. The said conversion would
merely ensure that regardless of the performance of the Philippine Pesos, planholders of petitioner
PPI are guaranteed payment upon maturity of the NAPOCOR Bonds, without fear that their share
will be substantially diluted. In fact, the planholders may even benefit from this modification in the
rehabilitation plan if the United States dollars appreciates in 2010.66

As can be gleaned from the foregoing, the modification guarantees that each planholder has an
adequate return on his/her investment regardless of changes in the surge of the Philippine
economy. 67

We, therefore, agree with respondent that the proposed modification seeks to establish a balance
between adequate returns to the planholders/creditors, while ensuring that respondent shall be an
on-going concern that can eventually undergo normal operations after the implementation of the
MRP. 68

Second. The recommendation of the Rehabilitation Receiver cannot simply be unsung without
violating the basic tenet of Section 14, Rule 4 of the Interim Rules, which provides the powers and
functions of the Rehabilitation Receiver, thus:

Sec. 14. Powers and Functions of the Rehabilitation Receiver. - The Rehabilitation Receiver shall
nottake over the management and control of the debtor but shall closely oversee and monitor the
operations of the debtor during the pendency of the proceedings, and for this purpose shall have the
powers, duties and functions of a receiver under Presidential Decree No. 902-A, as amended, and
the Rules of Court.

x x x Accordingly, he shall have the following powers and functions:

xxxx

(j) To monitor the operations of the debtor and to immediately report to the court any material
adverse change in the debtor's business;

xxxx

(l) To determine and recommend to the court the best way to salvage and protect the interests of the
creditors, stockholders, and the general public;

xxxx

(v) To recommend any modification of an approved rehabilitation plan as he may deem appropriate;

(w) To bring to the attention of the court any material change affecting the debtor's ability to meet the
obligations under the rehabilitation plan;

x x x.69

As correctly recognized by the Rehabilitation Court in its Resolution dated July 28, 2008, the
Rehabilitation Receiver has the duty and authority to recommend any modification of an approved
rehabilitation plan as he may deem appropriate and for the purpose of achieving the desired targets
or goals set forth therein, thus:

It is the strenuous proposition of the CARR that under the Interim Rules, he has the duty to
recommend any modification of an approved rehabilitation plan as he may been appropriate. Ex
concesso, the Court recognizes that under Rule 4, Section 26 of the Interim Rules, an approved
rehabilitation plan may be modified if, in the judgment of the Court, such modification is necessary to
achieve the desired targets or goals set forth therein. 70

The Rehabilitation Rules allow the modification and alteration of the rehabilitation plan precisely
because ofconditions that may supervene or affect the implementation thereof subsequent to its
approval. In the case at bar, to force through with the tuition support would surely jeopardize the
implementation of the ARP in the long-run since it would not be feasible to keep on liquidating the
NAPOCOR Bonds.

Third. We confirm that there is a substantial likelihood for respondent to be successfully rehabilitated
considering that its business remains viable and is operating on a going-concern premise.

A careful reading of the records will show that respondent’s liquidity problems were mostly caused
by the deregulation of the education sector, which triggered sharp increases in tuition fees of schools
and universities beyond what was projected by pre-need companies dealing with traditional
educational plans. Surely, we are mindful of the financial distress in 1997, which has destroyed
various institutions not only in the Philippines but across Asia, further compromising the pre-need
industry’s ability to meet its obligations under the PEPTrads. The surrounding circumstances of the
time was peculiar and may no longer be pertinent at present.

Thus, pointing fingers to respondent at this point for its alleged mismanagement of assets would be
irrational, and even counter-productive, because the feasibility of respondent’s rehabilitation has
already been duly established by the Rehabilitation Court. A subsequent allegation to the contrary
has no leg to stand on. Conversely, by virtue of the corporate rehabilitation, respondentwill have
enough breathing room to improve its operations in order to sustain its business operations and at
the same time, settle all its outstanding obligations in a just and fair manner, in accordance with the
MRP. In this regard, We find reason in respondent’s contention that the MRP will not only be
beneficial to itself, but also to its planholders and creditors as well. Anent petitioner’s argument that
the approval of the MRP is offensive to the non-impairment clause of the Constitution, the same fails
to persuade.

Petitioner’s interpretation of Section 37 of the Rehabilitation Rules vis-à-vis the means within which a
rehabilitation plan may be pursued, is misplaced. As held in a plethora of cases, a rehabilitation plan
may involve a reduction of liability. On this score, the principle enunciated in Pacific Wide Realty and
Development Corporation v. Puerto Azul Land, Inc.,  is instructive, thus –
71

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per findings of
fact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI would not be
prejudicial to the interest of PWRDC as a secured creditor. Enlightening is the observation of the CA
in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as
found by the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its
creditors at deep discounts of as much as 85%. Meaning, PALI’s creditors accepted only 15% of
their credit’s value. Stated otherwise, if PALI’s creditors are in a position to accept 15% of their
credit’s value, with more reason that they should be able to accept 50% thereof as full settlement by
their debtor. x x x.
72

Here, petitioner’s claim is not cancelled or obliterated all together.  Contrary to her view, petitioner’s
1awp++i1

claim isin fact restructured in a way that would allow respondent to revive its financial health while
offering the optimal returns to its clients.
It is undisputable that the corporation is in the process of corporate rehabilitation precisely because it
is undergoing financial distress. Petitioner cannot expect to receive the contracted amount owed by
respondent because a modification of the terms and conditions of the contract is certainly
foreseeable and reasonable in a corporate rehabilitation case, as correctly held by the Rehabilitation
Court, to wit:

x x x It is an established principle in rehabilitation proceedings that rehabilitation courts have the

cram down power to approve rehabilitation plans even over the objections of creditors, which cram
down power shall nonetheless bind the latter. In fact, the CARR is given the authority to "notify
counterparties and the court asto contracts that the debtor has decided to continue to perform or
breach." A fortiori, the mere impairment of contracts is not a justification to question the modification
of a rehabilitation plan because the very nature of rehabilitation proceedings sometimes necessitates
such a course of action. 73

Indeed, the rights of petitioner arising from the contracts it entered with respondent are not in any
way weakened by the approval of the ARP, and then the MRP, despiteany reduction in the amount
of the obligation due to petitioner. As enunciated in Pacific Wide,  the reduction of the debt of the
74

debtor is one of the essential features of a rehabilitation case, and is not considered prejudicial to
the interest of a secured creditor, thus:

We find nothing onerous in the terms of PALI's rehabilitation plan. The Interim Rules on Corporate
Rehabilitation provides for means of execution of the rehabilitation plan, which may include, among
others, the conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion
en pago, or sale of assets or of the controlling interest.

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per findings
offact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI would notbe
prejudicial to the interest of PWRDC as a secured creditor. Enlightening is the observation of the CA
in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as
found by the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its
creditors at deep discounts of as much as 85%. Meaning, PALI's creditors accepted only 15% of
their credit's value. Stated otherwise, if PALI's creditors are in a position to accept 15% of their
credit's value, with more reason that they should be able to accept 50% thereof as full settlement by
their debtor. x x x.

We also find no merit in PWRDC’s contention that there is a violation of the impairment clause.
Section 10, Article III of the Constitution mandates that no law impairing the obligations of contract
shall be passed. This case does not involve a law or an executive issuance declaring the
modification of the contract among debtor PALI, its creditors and its accommodation mortgagors.
Thus, the non-impairment clause may not be invoked. Furthermore, as held in Oposa v. Factoran,
Jr.even assuming that the same may be invoked, the non-impairment clause must yield to the police
power of the State. Property rights and contractual rights are not absolute. The constitutional
guaranty of nonimpairment of obligations is limited by the exercise of the police power of the State
for the common good of the general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors, employees,
and the economy in general.  The court may approve a rehabilitation plan evenover the opposition of
1âwphi1

creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of
the debtor isfeasible and the opposition of the creditors is manifestly unreasonable. The
rehabilitation plan, once approved, is binding upon the debtor and all persons who may be affected
by it, including the creditors, whether or not such persons have participated in the proceedings or
have opposed the plan or whether or not their claims have been scheduled. 75

Similarly, the reasoning laid down by the CA for the application of the cram-down power of the
Rehabilitation Court is enlightening, thus:

This Court likewise rejects petitioner Aquino’s claims that the Modified Rehabilitation Plan
constitutes an impairment of contracts. The non-impairment clause under the Constitution applies
only to the exercise of legislative power. It does not apply to the Rehabilitation Court which exercises
judicial power over the rehabilitation proceedings. As held by the Supreme Court in Bank of the
Philippine Islands vs. Securities and Exchange Commission, [G.R. No. 164641, December 20, 2007:

"The Court reiterates that the SEC’s approval of the Rehabilitation Plan did not impair BPI’s right to
contract. As correctly contended by private respondents, the nonimpairment clause is a limit on the
exercise of legislative power and not of judicial or quasi-judicial power. The SEC, through the
hearing panel that heard the petition for approval of the Rehabilitation Plan, was acting as a quasi
judicial body and thus, its order approving the plan cannot constitute an impairment of the right and
the freedom to contract."76

In view of all of the foregoing, We find no basis to overturn the findings of the CA with respect to the
substantive issues in this case. Accordingly, the prayer for the issuance of a TRO and/or a writ of
preliminary injunction must necessarily fail.

A final note. The evolving times of corporate rehabilitation, owing to the rise and fall of economic
activity over time, calls on the Judiciary to take an active role in filling in the gaps of the law
pertaining to this issue as the inimitable factual milieu of each case would require a different
approach in the application of prevailing laws, rules and regulations on corporate rehabilitation. In
the case at bar, we hold that the modification of the rehabilitation plan is a risk management tool to
address the volatility of the exchange rate of the Philippine Peso vis-à-vis the U.S. Dollars, with the
goal of ensuring that all planholders or creditors receive adequate returns regardless of the tides of
the Philippine market by making payment in U.S. Dollars. This plan would prevent the trust fund of
respondent from being diluted due to the appreciation of the Philippine Peso and assure that all
planholders and creditors shall receive payment upon maturity of the NAPOCOR bonds in the most
equitable manner.

WHEREFORE, the petition is DENIED. The February 26, 2010 Decision and July 21, 2010
Resolution of the Court of Appeals in CA-G.R. SP No. 105237 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 146322             December 6, 2006

ERNESTO RAMAS UYPITCHING and RAMAS UYPITCHING SONS, INC., petitioners,

vs.
ERNESTO QUIAMCO, respondent.
 DECISION

CORONA, J.:

Honeste vivere, non alterum laedere et jus suum cuique tribuere. To live virtuously, not to injure
others and to give everyone his due. These supreme norms of justice are the underlying principles of
law and order in society. We reaffirm them in this petition for review on certiorari assailing the July
26, 2000 decision1 and October 18, 2000 resolution of the Court of Appeals (CA) in CA-G.R. CV No.
47571.

In 1982, respondent Ernesto C. Quiamco was approached by Juan Davalan,2 Josefino Gabutero and
Raul Generoso to amicably settle the civil aspect of a criminal case for robbery3 filed by Quiamco
against them. They surrendered to him a red Honda XL-100 motorcycle and a photocopy of its
certificate of registration. Respondent asked for the original certificate of registration but the three
accused never came to see him again. Meanwhile, the motorcycle was parked in an open space
inside respondent’s business establishment, Avesco-AVNE Enterprises, where it was visible and
accessible to the public.

It turned out that, in October 1981, the motorcycle had been sold on installment basis to Gabutero by
petitioner Ramas Uypitching Sons, Inc., a family-owned corporation managed by petitioner Atty.
Ernesto Ramas Uypitching. To secure its payment, the motorcycle was mortgaged to petitioner
corporation.4

When Gabutero could no longer pay the installments, Davalan assumed the obligation and
continued the payments. In September 1982, however, Davalan stopped paying the remaining
installments and told petitioner corporation’s collector, Wilfredo Veraño, that the motorcycle had
allegedly been "taken by respondent’s men."

Nine years later, on January 26, 1991, petitioner Uypitching, accompanied by policemen,5 went to
Avesco-AVNE Enterprises to recover the motorcycle. The leader of the police team, P/Lt. Arturo
Vendiola, talked to the clerk in charge and asked for respondent. While P/Lt. Vendiola and the clerk
were talking, petitioner Uypitching paced back and forth inside the establishment uttering "Quiamco
is a thief of a motorcycle."

On learning that respondent was not in Avesco-AVNE Enterprises, the policemen left to look for
respondent in his residence while petitioner Uypitching stayed in the establishment to take
photographs of the motorcycle. Unable to find respondent, the policemen went back to Avesco-
AVNE Enterprises and, on petitioner Uypitching’s instruction and over the clerk’s objection, took the
motorcycle.

On February 18, 1991, petitioner Uypitching filed a criminal complaint for qualified theft and/or
violation of the Anti-Fencing Law6 against respondent in the Office of the City Prosecutor of
Dumaguete City.7 Respondent moved for dismissal because the complaint did not charge an offense
as he had neither stolen nor bought the motorcycle. The Office of the City Prosecutor dismissed the
complaint8 and denied petitioner Uypitching’s subsequent motion for reconsideration.
Respondent filed an action for damages against petitioners in the RTC of Dumaguete City, Negros
Oriental, Branch 37.9 He sought to hold the petitioners liable for the following: (1) unlawful taking of
the motorcycle; (2) utterance of a defamatory remark (that respondent was a thief) and (3)
precipitate filing of a baseless and malicious complaint. These acts humiliated and embarrassed the
respondent and injured his reputation and integrity.

On July 30, 1994, the trial court rendered a decision10 finding that petitioner Uypitching was
motivated with malice and ill will when he called respondent a thief, took the motorcycle in an
abusive manner and filed a baseless complaint for qualified theft and/or violation of the Anti-Fencing
Law. Petitioners’ acts were found to be contrary to Articles 1911 and 2012 of the Civil Code. Hence,
the trial court held petitioners liable to respondent for P500,000 moral damages, P200,000
exemplary damages and P50,000 attorney’s fees plus costs.

Petitioners appealed the RTC decision but the CA affirmed the trial court’s decision with
modification, reducing the award of moral and exemplary damages to P300,000 and P100,000,
respectively.13 Petitioners sought reconsideration but it was denied. Thus, this petition.

In their petition and memorandum, petitioners submit that the sole (allegedly) issue to be resolved
here is whether the filing of a complaint for qualified theft and/or violation of the Anti-Fencing Law in
the Office of the City Prosecutor warranted the award of moral damages, exemplary damages,
attorney’s fees and costs in favor of respondent.

Petitioners’ suggestion is misleading. They were held liable for damages not only for instituting a
groundless complaint against respondent but also for making a slanderous remark and for taking the
motorcycle from respondent’s establishment in an abusive manner.

Correctness of the Findings of the RTC and CA

As they never questioned the findings of the RTC and CA that malice and ill will attended not only
the public imputation of a crime to respondent14 but also the taking of the motorcycle, petitioners
were deemed to have accepted the correctness of such findings. This alone was sufficient to hold
petitioners liable for damages to respondent.

Nevertheless, to address petitioners’ concern, we also find that the trial and appellate courts
correctly ruled that the filing of the complaint was tainted with malice and bad faith. Petitioners
themselves in fact described their action as a "precipitate act."15 Petitioners were bent on portraying
respondent as a thief. In this connection, we quote with approval the following findings of the RTC,
as adopted by the CA:

x x x There was malice or ill-will [in filing the complaint before the City Prosecutor’s Office]
because Atty. Ernesto Ramas Uypitching knew or ought to have known as he is a lawyer,
that there was no probable cause at all for filing a criminal complaint for qualified theft and
fencing activity against [respondent]. Atty. Uypitching had no personal knowledge that
[respondent] stole the motorcycle in question. He was merely told by his bill collector ([i.e.]
the bill collector of Ramas Uypitching Sons, Inc.)[,] Wilfredo Veraño[,] that Juan Dabalan will
[no longer] pay the remaining installment(s) for the motorcycle because the motorcycle was
taken by the men of [respondent]. It must be noted that the term used by Wilfredo Veraño in
informing Atty. Ernesto Ramas Uypitching of the refusal of Juan Dabalan to pay for the
remaining installment was [‘]taken[’], not [‘]unlawfully taken[’] or ‘stolen.’ Yet, despite the
double hearsay, Atty. Ernesto Ramas Uypitching not only executed the [complaint-affidavit]
wherein he named [respondent] as ‘the suspect’ of the stolen motorcycle but also charged
[respondent] of ‘qualified theft and fencing activity’ before the City [Prosecutor’s] Office of
 Dumaguete. The absence of probable cause necessarily signifies the presence of malice.
What is deplorable in all these is that Juan Dabalan, the owner of the motorcycle, did not
accuse [respondent] or the latter’s men of stealing the motorcycle[,] much less bother[ed] to
file a case for qualified theft before the authorities. That Atty. Uypitching’s act in charging
[respondent] with qualified theft and fencing activity is tainted with malice is also shown by
his answer to the question of Cupid Gonzaga16 [during one of their conversations] - "why
should you still file a complaint? You have already recovered the motorcycle…"[:] "Aron
motagam ang kawatan ug motor." ("To teach a lesson to the thief of motorcycle.")17

Moreover, the existence of malice, ill will or bad faith is a factual matter. As a rule, findings of fact of
the trial court, when affirmed by the appellate court, are conclusive on this Court. We see no
compelling reason to reverse the findings of the RTC and the CA.

Petitioners Abused Their Right of Recovery as Mortgagee(s)

Petitioners claim that they should not be held liable for petitioner corporation’s exercise of its right as
seller-mortgagee to recover the mortgaged vehicle preliminary to the enforcement of its right to
foreclose on the mortgage in case of default. They are clearly mistaken.

True, a mortgagee may take steps to recover the mortgaged property to enable it to enforce or
protect its foreclosure right thereon. There is, however, a well-defined procedure for the recovery of
possession of mortgaged property: if a mortgagee is unable to obtain possession of a mortgaged
property for its sale on foreclosure, he must bring a civil action either to recover such possession as
a preliminary step to the sale, or to obtain judicial foreclosure.18

Petitioner corporation failed to bring the proper civil action necessary to acquire legal possession of
the motorcycle. Instead, petitioner Uypitching descended on respondent’s establishment with his
policemen and ordered the seizure of the motorcycle without a search warrant or court order. Worse,
in the course of the illegal seizure of the motorcycle, petitioner Uypitching even mouthed a
slanderous statement.

No doubt, petitioner corporation, acting through its co-petitioner Uypitching, blatantly disregarded the
lawful procedure for the enforcement of its right, to the prejudice of respondent. Petitioners’ acts
violated the law as well as public morals, and transgressed the proper norms of human relations.

The basic principle of human relations, embodied in Article 19 of the Civil Code, provides:

Art. 19. Every person must in the exercise of his rights and in the performance of his duties,
act with justice, give every one his due, and observe honesty and good faith.

Article 19, also known as the "principle of abuse of right," prescribes that a person should not use his
right unjustly or contrary to honesty and good faith, otherwise he opens himself to liability.19 It seeks
to preclude the use of, or the tendency to use, a legal right (or duty) as a means to unjust ends.

There is an abuse of right when it is exercised solely to prejudice or injure another.20 The exercise of
a right must be in accordance with the purpose for which it was established and must not be
excessive or unduly harsh; there must be no intention to harm another.21 Otherwise, liability for
damages to the injured party will attach.

In this case, the manner by which the motorcycle was taken at petitioners’ instance was not only
attended by bad faith but also contrary to the procedure laid down by law. Considered in conjunction
with the defamatory statement, petitioners’ exercise of the right to recover the mortgaged vehicle
was utterly prejudicial and injurious to respondent. On the other hand, the precipitate act of filing an
unfounded complaint could not in any way be considered to be in accordance with the purpose for
which the right to prosecute a crime was established. Thus, the totality of petitioners’ actions showed
a calculated design to embarrass, humiliate and publicly ridicule respondent. Petitioners acted in an
excessively harsh fashion to the prejudice of respondent. Contrary to law, petitioners willfully caused
damage to respondent. Hence, they should indemnify him.22

WHEREFORE, the petition is hereby DENIED. The July 26, 2000 decision and October 18, 2000
resolution of the Court of Appeals in CA-G.R. CV No. 47571 are AFFIRMED.

Triple costs against petitioners, considering that petitioner Ernesto Ramas Uypitching is a lawyer
and an officer of the court, for his improper behavior.

SO ORDERED.

G.R. No. 128567             September 1, 2000

HUERTA ALBA RESORT INC., petitioner,
vs.
COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP INC., respondents.

PURISIMA, J.:

Litigation must at some time be terminated, even at the risk of occasional errors. Public policy
dictates that once a judgment becomes final, executory and unappealable, the prevailing party
should not be denied the fruits of his victory by some subterfuge devised by the losing party.
Unjustified delay in the enforcement of a judgment sets at naught the role of courts in disposing
justiciable controversies with finality.

The Case

At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March
11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21,
1995 and Order, dated September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case
No. 89-5424. The aforesaid orders of the trial court held that petitioner had the right to redeem
subject pieces of property within the one-year period prescribed by Section 78 of Republic Act No.
337 otherwise known as the General Banking Act.

Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of a bank,
banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right,
within one year after the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property."

The Facts

The facts that matter are undisputed:

In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19,
1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein
private respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to
Intercon Fund Resource, Inc. ("Intercon").

Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to
P8.5 million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid
parcels of land as security for the said loan.

In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover
to the private respondent, on the ground that the same was ultra vires. Petitioner also questioned
during the trial the correctness of the charges and interest on the mortgage debt in question.

On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice
Buenaventura J. Guerrero, came out with its decision "granting herein private respondent SMGI's
complaint for judicial foreclosure of mortgage", disposing as follows:

"WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the

following:

(1) P8,500,000.00 representing the principal of the amount due;

 (2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;

(3) 22% per annum interest on the above principal from September 6, 1998, until fully
paid;

(4) 5% of the sum total of the above amounts, as reasonable attorney's fees; and,

(5) Costs.

All the above must be paid within a period of not less than 150 days from receipt hereof by
the defendant. In default of such payment, the four parcels of land subject matter of the suit
including its improvements shall be sold to realize the mortgage debt and costs, in the
manner and under the regulations that govern sales of real estate under execution." 1

Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as
CA-G.R. CV No. 39243 before the Sixth Division of the appellate court, which dismissed the case on
June 29, 1993 on the ground of late payment of docket fees.

Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for
certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss on December 13,
1993, on the finding that the Court of Appeals erred not in dismissing the appeal of petitioner.

Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied
with finality in this Court's Resolution promulgated on February 16, 1994. On March 10, 1994, leave
to present a second motion for reconsideration in G.R. No. 112044 or to submit the case for hearing
by the Court en banc was filed, but to no avail. The Court resolved to deny the same on May 11,
1994.

On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and
executory and was entered in the Book of Entries of Judgment.

On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the
Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on
July 15, 1994.

Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and
Execution was issued by the Sheriff concerned, who issued on August 1, 1994 a Notice of Sheriff's
Sale for the auction of subject properties on September 6, 1994.

On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set
Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of
Execution. To support its motion, petitioner invited attention and argued that the records of the case
were still with the Court of Appeals and therefore, issuance of the writ of execution was premature
since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed and
petitioner had not yet defaulted in the payment thereof since no demand for its payment was made
by the private respondent. In petitioner's own words, the dispute between the parties was "principally
on the issue as to when the 150-day period within which Huerta Alba may exercise its equity of
redemption should be counted."

In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to quash the writ
of execution in Civil Case No. 89-5424, opining that subject judgment had become final and
executory and consequently, execution thereof was a matter of right and the issuance of the
corresponding writ of execution became its ministerial duty.

Challenging the said order granting execution, petitioner filed once more with the Court of Appeals
another petition for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP
No. 35086, predicated on the same grounds invoked for its Motion to Quash Writ of Execution.

On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and
the private respondent was declared the highest bidder. Thus, private respondent was awarded
subject bidded pieces of property. The covering Certificate of Sale issued in its favor was registered
with the Registry of Deeds on October 21, 1994.

On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court
to "clarify" whether or not the twelve (12) month period of redemption for ordinary execution applied
in the case.

On September 26, 1994, the trial court ruled that the period of redemption of subject property should
be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of
Court.

Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to
Set Aside Said Order, contending that the said Order materially altered the Decision dated April 30,
1992 "which declared that the satisfaction of the judgment shall be in the manner and under the
regulation that govern sale of real estate under execution."

Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised
by the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within
which petitioner may redeem subject properties should be computed from the date petitioner was
notified of the Entry of Judgment in G.R. No. 112044; and that the 150-day period within which
petitioner may exercise its equity of redemption expired on September 11, 1994.

Thus:

"Petitioner must have received the resolution of the Supreme Court dated February 16, 1994
denying with finality its motion for reconsideration in G.R. No. 112044 before March 14,
1994, otherwise the Supreme Court would not have made an entry of judgment on March 14,
1994. While, computing the 150-day period. Petitioner may have until September 11, 1994.
within which to pay the amounts covered by the judgment, such period has already expired
by this time, and therefore, this Court has no more reason to pass upon the parties' opposing
contentions, the same having become moot and academic." (Emphasis supplied).
2 

Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No.
35086. In its Motion for Reconsideration dated October 18, 1994, petitioner theorized that the period
of one hundred fifty (150) days should not be reckoned with from Entry of Judgment but from receipt
on or before July 29, 1994 by the trial court of the records of Civil Case No. 89-5424 from the Court
of Appeals. So also, petitioner maintained that it may not be considered in default, even after the
expiration of 150 days from July 29, 1994, because prior demand to pay was never made on it by
the private respondent. According to petitioner, it was therefore, premature for the trial court to issue
a writ of execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the
pendency of petitioner's Motion for Reconsideration in CA-G.R. SP No. 35086.

On December 23, 1994, the Court of Appeals denied petitioner's motion for reconsideration in CA-
G.R. SP No. 35086. Absent any further action with respect to the denial of the subject motion for
reconsideration, private respondent presented a Second Motion for Confirmation of Certificate of
Sale before the trial court.

As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP
No. 35086 it became final and executory on January 25, 1995.

On February 10, 1995, the lower court confirmed the sale of subject properties to the private
respondent. The pertinent Order declared that all pending incidents relating to the Order dated
September 26, 1994 had become moot and academic. Conformably, the Transfer Certificates of
Title to subject pieces of property were then issued to the private respondent.

On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking
"clarification" of the date of commencement of the one (1) year period for the redemption of the
properties in question.

In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for
Clarification since its Decision promulgated on September 30, 1994 had already become final and
executory; ratiocinating thus:

"We view the motion for clarification filed by petitioner, purportedly signed by its proprietor,
but which we believe was prepared by a lawyer who wishes to hide under the cloak of
anonymity, as a veiled attempt to buy time and to delay further the disposition of this case.

Our decision of September 30, 1994 never dealt on the right and period of redemption of
petitioner, but was merely circumscribed to the question of whether respondent judge could
issue a writ of execution in its Civil Case No. 89-5424 . . .

We further ruled that the one-hundred fifty day period within which petitioner may exercise
its equity of redemption should be counted, not from the receipt of respondent court of the
records of Civil Case No. 89-5424 but from the date petitioner was notified of the entry of
judgment made by the appellate court.

But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial. and as such the mortgagor
has only the equity not the right of redemption . . . While it may be true that under Section 78
of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group,. Inc., is a
bank or credit institution was never brought before us squarely, and it is indeed odd and
strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification." (Emphasis supplied).
3 

Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals
in CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner
should have averred in its pleading that it was entitled to the beneficial provisions of Section 78 of
R.A. No. 337; but again, petitioner did not make any such allegation in its answer.

From the said Resolution, petitioner took no further step such that on March 31, 1995, the private
respondent filed a Motion for Issuance of Writ of Possession with the trial court.

During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance
and asked for time to interpose opposition to the Motion for Issuance of Writ of Possession.

On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of Possession,
petitioner filed a "Motion to Compel Private Respondent to Accept Redemption." It was the first time
petitioner ever asserted the right to redeem subject properties under Section 78 of R.A. No. 337, the
General Banking Act; theorizing that the original mortgagee, being a credit institution, its assignment
of the mortgage credit to petitioner did not remove petitioner from the coverage of Section 78 of R.A.
No. 337. Therefore, it should have the right to redeem subject properties within one year from
registration of the auction sale, theorized the petitioner which concluded that in view of its "right of
redemption," the issuance of the titles over subject parcels of land to the private respondent was
irregular and premature.

In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied
private respondent's motion for a writ of possession, opining that Section 78 of the General Banking
Act was applicable and therefore, the petitioner had until October 21, 1995 to redeem the said
parcels of land, said Order ruled as follows:

"It is undisputed that Intercon is a credit institution from which defendant obtained a loan
secured with a real estate mortgage over four (4) parcels of land. Assuming that the
mortgage debt had not been assigned to plaintiff, there is then no question that defendant
would have a right of redemption in case of foreclosure, judicially or extrajudicially, pursuant
to the above quoted Section 78 of RA 337, as amended.

However, the pivotal issue here is whether or not the defendant lost its right of redemption by
virtue of the assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or
credit institution. The issue is resolved in the negative. The right of redemption in this case is
vested by law and is therefore an absolute privilege which defendant may not lose even
though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of
Appeals, 106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of
Section 78 because all that may be needed to deprive a defaulting mortgagor of his right of
redemption is to assign his mortgage debt from a bank or credit institution to one which is
not. Protection of defaulting mortgagors, which is the avowed policy behind the provision,
would not be achieved if the ruling were otherwise. Consequently, defendant still possesses
its right of redemption which it may exercise up to October 21, 1995 only, which is one year
from the date of registration of the certificate of sale of subject properties (GSIS versus
Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).

Since the period to exercise defendant's right of redemption has not yet expired, the
cancellation of defendant's transfer certificates of title and the issuance of new ones in lieu
thereof in favor of plaintiff are therefore illegal for being premature, thereby necessitating
reconveyance (see Sec. 63 (a) PD 1529, as amended).

WHEREFORE, the Court hereby rules as follows:

 (1) The Motion for Issuance of Writ of Possession is hereby denied;

(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an
amount computed according to the terms stated in the Writ of Execution dated July
15, 1994 plus all other related costs and expenses mentioned under Section 78, RA
337, as amended; and

(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the
defendant the following titles of the four (4) parcels of land, namely TCT Nos. V-
38878, V-38879, V-38880, and V-38881, now in the name of plaintiff, and (b) to
register the certificate of sale dated October 7, 1994 and the Order confirming the
sale dated February 10, 1995 by a brief memorandum thereof upon the transfer
certificates of title to be issued in the name of defendant, pursuant to Sec. 63 (a) PD
1529, as amended.

The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now
deemed resolved.

SO ORDERED." 4

Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to
no avail. In its Order dated September 4, 1995, the trial court denied the same.

To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4,
1995 of the trial court, the private respondent filed with this court a Petition for Certiorari, Prohibition
and Mandamus, docketed as G.R. No. 121893, but absent any special and cogent reason shown for
entertaining the same, the Court referred the petition to the Court of Appeals, for proper
determination.

Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the
petition and set aside the trial court's Order dated July 21, 1995 and Order dated September 4,
1995.

In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion for
Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R. No. 38747.

Undaunted, petitioner has come to this Court via the present petition, placing reliance on the
assignment of errors, that:

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE

COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED
"WITH FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION
BUT ONLY THE EQUITY OF REDEMPTION.

II

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT

PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).
 III

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT

PRIVATE RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO
THE ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY. 5

In its comment on the petition, private respondent countered that:

"A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED

WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT
OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.

B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE

FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT,
PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE
SUBJECT PROPERTIES.

C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF

ITS ALLEGED 'RIGHT OF REDEMPTION. HDAECI

D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF REDEMPTION' OVER THE
SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE 'LAW OF THE
CASE."' 6

And by way of Reply, petitioner argued, that:

I.

THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN — WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
337.

II.

THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1)
YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.

III.

THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS ABSOLUTELY NO BEARING HERE:

(1)

THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT
PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL
CASE NO. 89-5424.

(2)
 THUS, THE RTC'S ORDER RECOGNIZING PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE
EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL
CASE NO. 89-5424.

The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not
the petitioner has the one-year right of redemption of subject properties under Section 78 of
Republic Act No. 337 otherwise known as the General Banking Act.

The petition is not visited by merit.

Petitioner's assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on
the submission that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086;
contending thus:

(1)

BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP

NO. 35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED
'WITH FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA ALBA HAD THE
RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS TO MERELY
NOTE THE MOTION FOR CLARIFICATION.

(2)

THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL

JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO
BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.

(3)

PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY
BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.

(4)

THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY

BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION,
THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT OF THE
MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY
NOTE THE MOTION. EASIHa

II.

IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND
JOINED BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL COURT.

III.
 THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY
AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO
RECOGNIZE SUCH RIGHT.

IV.

EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA

ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO
AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.

V.

THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL
COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE
LAW.

From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has
been adjudged to have was only the equity of redemption over subject properties. On the distinction
between the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs.
Intermediate Appellate Court, comes to the fore. Held the Court in the said case:
7 

"The equity of redemption is, to be sure, different from and should not be confused with
the right of redemption.

The right of redemption in relation to a mortgage – understood in the sense of a prerogative

to re-acquire mortgaged property after registration of the foreclosure sale – exists only in the
case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial
foreclosure except only where the mortgagee is the Philippine National Bank or a bank or
banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the sheriff's certificate of foreclosure
sale.

Where the foreclosure is judicially effected, however, no equivalent right of redemption

exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of the
court. . . . shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser, subject to such rights of redemption as may be allowed by law.' Such
rights exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court) are
those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and
the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in
interest or any judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure — after confirmation by the court of the foreclosure sale — which right may be
exercised within a period of one (1) year, counted from the date of registration of the
certificate of sale in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage
if the mortgagee is not the PNB or a bank or banking institution. In such a case, the
foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest the
rights of all the parties to the action and to vest their rights in the purchaser.' There then
exists only what is known as the equity of redemption. This is simply the right of the
 defendant mortgagor to extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Section 2, Rule 68 provides that —

'. . If upon the trial . . the court shall find the facts set forth in the complaint to be true, it shall
ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including
interest and costs, and shall render judgment for the sum so found due and order the same
to be paid into court within a period of not less than ninety (90) days from the date of the
service of such order, and that in default of such payment the property be sold to realize the
mortgage debt and costs.'

This is the mortgagor's equity (not right) of redemption which, as above stated, may be

exercised by him even beyond the 90-day period 'from the date of service of the order,' and
even after the foreclosure sale itself, provided it be before the order of confirmation of the
sale. After such order of confirmation, no redemption can be effected any longer." (Emphasis 8 

supplied)

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.

Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is
a credit institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated
differently, it is the submission of petitioner that it should be allowed to redeem subject properties
within one year from the date of sale as a result of the foreclosure of the mortgage constituted
thereon.

The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right
under Section 78 of R.A. No. 337 to redeem subject properties.

Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court
of the foreclosure sale, and within one (1) year from the date of registration of the certificate of sale.
Indeed, the facts show that it was only on May 2, 1995 when, in opposition to the Motion for
Issuance of Writ of Possession, did petitioner file a Motion to Compel Private Respondent to Accept
Redemption, invoking for the very first time its alleged right to redeem subject properties under to
Section 78 of R.A. No. 337.

In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem
under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial
stages of the proceedings.

For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for
Clarification, petitioner failed to allege and prove that private respondent's predecessor in interest
was a credit institution and therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely
asked the trial court to clarify whether the sale of subject properties was execution sale or judicial
foreclosure sale.

So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside
Said Order dated October 13, 1994, petitioner again was silent on its alleged right under Section 78
of R.A. No. 337, even as it failed to show that private respondent's predecessor in interest is a credit
institution. Petitioner just argued that the aforementioned Order materially altered the trial court's
Decision of April 30, 1992.

Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337
and of the predecessor in interest of private respondent as a credit institution, when the trial court
came out with an order on February 10, 1995, confirming the sale of subject properties in favor of
private respondent and declaring that all pending incidents with respect to the Order dated
September 26, 1994 had become moot and academic.

Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of
Appeals, seeking "clarification" of the date of commencement of the one (1) year redemption period
for the subject properties, petitioner never intimated any alleged right under Section 78 of R.A. No.
337 nor did it invite attention to its present stance that private respondent's predecessor-in-interest
was a credit institution. Consequently, in its Resolution dated March 20, 1995, the Court of Appeals
ruled on the said motion thus:

"But we never made any pronouncement on the one-year right of redemption of petitioner

because, in the first place, the foreclosure in this case is judicial, and as such. the mortgagor
has only the equity. not the right of redemption . . . While it may be true that under Section 78
of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group. Inc., is
bank or credit institution was never brought before us squarely, and it is indeed odd and
strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification." (Emphasis supplied).
9 

If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in
CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so.

Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial
foreclosure, petitioner should have alleged that it was entitled to the beneficial provisions of Section
78 of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right
thereunder. It bears stressing that the applicability of Section 78 of R.A. No. 337 hinges on the
factual question of whether or not private respondent's predecessor in interest was a credit
institution. As was held in Limpin, a judicial foreclosure sale, "when confirmed by an order of the
court, . . shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law'," which confer on the
10 

mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after confirmation by the court of the judicial foreclosure sale. Thus,
the claim that petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 —since
private respondent's predecessor-in-interest is a credit institution — is in the nature of a compulsory
counterclaim which should have been averred in petitioner's answer to the compliant for judicial
foreclosure.

". . . A counterclaim is, most broadly, a cause of action existing in favor of the defendant
against the plaintiff. More narrowly, it is a claim which. if established, will defeat or in some
way qualify a judgment or relief to which plaintiff is otherwise entitled It is sometimes defined
as any cause of action arising in contract available against any action also arising in contract
and existing at the time of the commencement of such an action. It is frequently defined by
the codes as a cause of action arising out of the contract or transaction set forth in the
 complaint as the foundation of the plaintiff's claim, or connected with the subject of the
action." (emphasis supplied)
11 

"The counterclaim is in itself a distinct and independent cause of action, so that when
properly stated as such, the defendant becomes, in respect to the matters stated by him, an
actor, and there are two simultaneous actions pending between the same parties, wherein
each is at the same time both a plaintiff and a defendant. Counterclaim is an offensive as
well as a defensive plea and is not necessarily confined to the justice of the plaintiff's
claim. It represents the right of the defendant to have the claims of the parties
counterbalanced in whole or in part, and judgment to be entered in excess, if any. A
counterclaim stands on the same footing, and is to be tested be the same rules, as if it were
an independent action." (emphasis supplied)
12 

The very purpose of a counterclaim would have been served had petitioner alleged in its answer its
purported right under Section 78 of R.A. No. 337:

". . . The rules of counterclaim are designed to enable the disposition of a whole controversy
of interested parties' conflicting claims, at one time and in one action, provided all parties' be
brought before the court and the matter decided without prejudicing the rights of any party." 13

The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337
precludes it from so doing at this late stage case. Estoppel may be successfully invoked if the party
fails to raise the question in the early stages of the proceedings. Thus, "a party to a case who failed
14 

to invoked his claim in the main case, while having the opportunity to do so, will be precluded,
subsequently, from invoking his claim, even if it were true, after the decision has become final,
otherwise the judgment may be reduced to a mockery and the administration of justice may be
placed in disrepute." 15

All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing
petitioner to introduce evidence that private respondent's predecessor-in-interest was a credit
institution, and to thereafter rule that the petitioner was entitled to avail of the provisions of Section
78 of R.A. No. 337. In effect, the trial court permitted the petitioner to accomplish what the latter
failed to do before the Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A.
No. 337 although the Court of Appeals in CA-G.R. no. 35086 already found that 'the question of
whether the Syndicated Management Council Group, Inc. is a bank or credit institution was never
brought before (the Court of Appeals) squarely." The said pronouncement by the Court of Appeals
unerringly signified that petitioner did not make a timely assertion of any right under Section 78 of
R.A. No. 337 in all the stages of the proceedings below.

Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-
interest of the private respondent is a credit institution. Thus, when the trial court, and the Court of
Appeals repeatedly passed upon the issue of whether or not petitioner had the right of redemption or
equity of redemption over subject properties in the decisions, resolutions and orders, particularly in
Civil Case no. 89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No.
38747, it was unmistakable that the petitioner was adjudged to just have the equity of redemption
without any qualification whatsoever, that is, without any right of redemption allowed by law.

The "law of case" holds that petitioner has the equity of redemption without any qualification.

There is, therefore, merit in private respondent's contention that to allow petitioner to belatedly
invoke its right under Section 78 of R.A. No. 337 will disturb the "law of the case." However, private
respondent's statement of what constitutes the "law of the case" is not entirely accurate. The "law of
the case" is not simply that the defendant possesses an equity of redemption. As the Court has
stated, the "law of the case" holds that petitioner has the equity of the redemption without any
qualification whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No.
337. Whether or not the "law of the case" is erroneous is immaterial, it still remains the "law of the
case". A contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in
CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the
repeated attempts of petitioner to forestall so simple a matter as making the security given for a just
debt to answer for its payment.

Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the
Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the
rights of all the parties to the action and to vest their rights in private respondent. There then existed
only what is known as the equity of redemption, which is simply the right of the petitioner to
extinguish the mortgage and retain ownership of the property by paying the secured debt within the
90-day period after the judgment became final. There being an explicit finding on the part of the
Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 — that the herein
petitioner failed to exercise its equity of redemption within the prescribed period, redemption can no
longer be effected. The confirmation of the sale and the issuance of the transfer certificates of title
covering the subject properties to private respondent was then, in order. The trial court therefore,
has the ministerial duty to place private respondent in the possession of subject properties.

WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring
null and void the Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial
Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs.

SO ORDERED.
G.R. No. 224764

BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO V. MISAJON,

GROUP SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER REYNANTE DP.
MARTIREZ, Petitioners,
vs.
LEPANTO CERAMICS, INC., Respondent.

DECISION

PERLAS-BERNABE,, J.:

This is a direct recourse to the Court from the Regional Trial Court (RTC) of Calamba City, Province
of Laguna, Branch 35 (RTC Br. 35), through a petition for review on certiorari,   raising a pure
1

question of law. In particular, petitioners Bureau of Internal Revenue (BIR), Assistant Commissioner
Alfredo V. Misajon (Misajon), Group Supervisor Rolando M. Balbido (Balbido ), and Examiner
Reynante DP. Martirez (Martirez; collectively, petitioners) assail the Decision  dated June 1, 2015
2

and the Order  dated October 26, 2015 of the RTC Br. 35 in Civil Case No. 4813- 2014-C, which
3

found Misajon, Balbido, and Martirez (Misajon, et al.) guilty of indirect contempt and, accordingly,
ordered them to pay a fine of ₱5,000.00 each.

The Facts

On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) - a corporation duly organized and
existing under Philippine Laws with principal office address in Calamba City, Laguna - filed a
petition   for corporate rehabilitation pursuant to Republic Act No. (RA) 10142,   otherwise known as
4 5

the "Financial Rehabilitation and Insolvency Act (FRIA) of 2010," docketed before the RTC
ofCalamba City, Branch 34, the designated Special Commercial Court in Laguna (Rehabilitation
Court). Essentially, LCI alleged that due to the financial difficulties it has been experiencing dating
back to the Asian financial crisis, it had entered into a state of insolvency considering its inability to
pay its obligations as they become due and that its total liabilities amounting to ₱4,213 ,682, 715. 00
far exceed its total assets worth ₱1,112,723,941.00. Notably, LCI admitted in the annexes attached
to the aforesaid Petition its tax liabilities to the national government in the amount of at least
₱6,355,368.00. 6

On January 13, 2012, the Rehabilitation Court issued a Commencement Order,  which, inter alia:
7

(a) declared LCI to be under corporate rehabilitation; (b) suspended all actions or proceedings, in

court or otherwise, for the enforcement of claims against LCI; (c) prohibited LCI from making any
payment of its liabilities outstanding as of even date, except as may be provided under RA 10142;
and (d) directed the BIR to file and serve on LCI its comment or opposition to the petition, or its
claims against LCI.   Accordingly, the Commencement Order was published in a newspaper of
8

general circulation and the same, together with the petition for corporate rehabilitation, were
personally served upon LCI's creditors, including the BIR. 9

Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group Supervisor, and
Examiner, respectively, of the BIR's Large Taxpayers Service, sent LCI a notice of informal
conference  dated May 27, 2013, informing the latter of its deficiency internal tax liabilities for the
10

Fiscal Year ending June 30, 2010. In response, LCI's court-appointed receiver, Roberto L. Mendoza,
sent BIR a letter-reply, reminding the latter of the pendency of LCI's corporate rehabilitation
proceedings, as well as the issuance of a Commencement Order in connection therewith.
Undaunted, the BIR sent LCI a Formal Letter of Demand  dated May 9, 2014, requiring LCI to pay
11

deficiency taxes in the amount of P567,519,348.39.   This prompted LCI to file a petition   for
12 13

indirect contempt dated August 13, 2014 against petitioners before RTC Br. 35. In said petition, LCI
asserted that petitioners' act of pursuing the BIR's claims for deficiency taxes against LCI outside of
the pending rehabilitation proceedings in spite of the Commencement Order issued by the
Rehabilitation Court is a clear defiance of the aforesaid Order. As such, petitioners must be cited for
indirect contempt in accordance with Rule 71 of the Rules of Court in relation to Section 16 of RA
10142. 14

For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to cite them in contempt
as it is only the Rehabilitation Court, being the one that issued the Commencement Order, which has
the authority to determine whether or not such Order was defied; (b) the instant petition had already
been mooted by the Rehabilitation Court's Order  dated August 28, 2014 which declared LCI to have
15

been successfully rehabilitated resulting in the termination of the corporate rehabilitation

proceedings; (c) their acts do not amount to a defiance of the Commencement Order as it was done
merely to toll the prescriptive period in collecting deficiency taxes, and thus, sanctioned by the Rules
of Procedure of the FRIA; (d) their acts of sending a Notice of Informal Conference and Formal
Letter of Demand do not amount to a "legal action or other recourse" against LCI outside of the
rehabilitation proceedings; and (e) the indirect contempt proceedings interferes with the exercise of
their functions to collect taxes due to the govemment. 16

The RTC Br. 35 Ruling

In a Decision  dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of indirect contempt
17

and, accordingly, ordered them to pay a fine of ₱5,000.00 each.   Preliminarily, the RTC Br. 35 ruled
18

that it has jurisdiction over LCI's petition for indirect contempt as it is docketed, heard, and decided
separately from the principal action.   Going to petitioners' other contentions, the RTC found
19

that: (a) the supervening termination of the rehabilitation proceedings and the consequent lifting of
the Commencement Order did not render moot the petition for indirect contempt as the acts
complained of were already consummated; (b) petitioners' acts of sending LCI a notice of informal
conference and Formal Letter of Demand are covered by the Commencement Order as they were
for the purpose of pursuing and enforcing a claim for deficiency taxes, and thus, are in clear defiance
of the Commencement Order; and (c) petitioners could have tolled the prescriptive period to collect
deficiency taxes without violating the Commencement Order by simply ventilating their claim before
the rehabilitation proceedings, which they were adequately notified of. In this relation, the RTC Br.
35 held that while the BIR is a juridical entity which can only act through its authorized
intermediaries, it cannot be concluded that it authorized the latter to commit the contumacious acts
complained of, i.e., defiance of the Commencement Order. Thus, absent any contrary evidence, only
those individuals who performed such acts, namely, Misajon, et al., should be cited for indirect
contempt of court. 20

Aggrieved, Misaj on, et al. moved for reconsideration,   which was, however, denied in an
21

Order  dated October 26, 2015; hence, this petition.

22

The Issue Before the Court

The issue for the Court's resolution is whether or not the RTC Br. 35 correctly found Misajon, et
al. to have defied the Commencement Order and, accordingly, cited them for indirect contempt.

The Court's Ruling

The petition is without merit.

Section 4 (gg) of RA 10142 states:

Section 4. Definition of Terms. - As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation

and solvency, if it is shown that its continuance of operation is economically feasible and its creditors
can recover by way of the present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated.

xxxx

"[C]ase law has defined corporate rehabilitation as an attempt to conserve and administer the assets
of an insolvent corporation in the hope of its eventual return from financial stress to solvency. It
contemplates the continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and liquidity."23

Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the expenses of
the distressed corporation during the rehabilitation period by providing the best possible framework
for the corporation to gradually regain or achieve a sustainable operating form.   "[It] enable[s] the
24

company to gain a new lease in life and thereby allow creditors to be paid [t]heir claims from its
earnings. Thus, rehabilitation shall be undertaken when it is shown that the continued operation of
the corporation is economically more feasible and its creditors can recover, by way of the present
value of payments projected in the plan, more, if the corporation continues as a going concern than if
it is immediately liquidate d.
25

In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that upon the
issuance of a Commencement Order - which includes a Stay or Suspension Order - all actions or
proceedings, in court or otherwise, for the enforcement of "claims" against the distressed company
shall be suspended.  Under the same law, claim "shall refer to all claims or demands of whatever
26

nature or character against the debtor or its property, whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not
limited to; (1) all claims of the government, whether national or local, including taxes, tariffs
and customs duties; and (2) claims against directors and officers of the debtor arising from acts
done in the discharge of their functions falling within the scope of their authority: Provided, That, this
inclusion does not prohibit the creditors or third parties from filing cases against the directors and
officers acting in their personal capacities."
27

To clarify, however, creditors of the distressed corporation are not without remedy as they may still
submit their claims to the rehabilitation court for proper consideration so that they may participate in
the proceedings, keeping in mind the general policy of the law "to ensure or maintain certainty and
predictability in commercial affairs, preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors
who are similarly situated."  In other words, the creditors must ventilate their claims before the
28

rehabilitation court, and any "[a]ttempts to seek legal or other resource against the distressed
corporation shall be sufficient to support a finding of indirect contempt of court."
29
In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation. Finding the
same to be sufficient in form and substance, the Rehabilitation Court issued a Commencement
Order  dated January 13, 2012 which, inter alia: (a) declared LCI to be under corporate
30

rehabilitation; (b) suspended all actions or proceedings, in court or otherwise, for the enforcement of
claims against LCI; (c) prohibited LCI from making any payment of its outstanding liabilities as of
even date, except as may be provided under RA 10142; and (d) directed the BIR to file and serve on
LCI its comment or opposition to the petition, or its claims against LCI. It is likewise undisputed that
the BIR - personally and by publication - was notified of the rehabilitation proceedings involving LCI
and the issuance of the Commencement Order related thereto. Despite the foregoing, the BIR,
through Misajon, et al., still opted to send LCI: (a) a notice of informal conference  dated May 27,
31

2013, informing the latter of its deficiency internal tax liabilities for the Fiscal Year ending June 30,
2010; and (b) a Formal Letter of Demand  dated May 9, 2014, requiring LCI to pay deficiency taxes
32

in the amount of P567,5 l 9,348.39, notwithstanding the written reminder coming from LCI's court-
appointed receiver of the pendency of rehabilitation proceedings concerning LCI and the issuance of
a commencement order. Notably, the acts of sending a notice of informal conference and a Formal
Letter of Demand are part and parcel of the entire process for the assessment and collection of
deficiency taxes from a delinquent taxpayer,  - an action or proceeding for the enforcement of a
33

claim which should have been suspended pursuant to the Commencement Order. Unmistakably,
Misajon, et al. 's foregoing acts are in clear defiance of the Commencement Order.

Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the prescriptive period
for the collection of deficiency taxes; and (b) to cite them in indirect contempt would unduly interfere
with their function of collecting taxes due to the government, cannot be given any credence. As aptly
put by the RTC Br. 35, they could have easily tolled the running of such prescriptive period, and at
the same time, perform their functions as officers of the BIR, without defying the Commencement
Order and without violating the laudable purpose of RA 10142 by simply ventilating their claim before
the Rehabilitation Court.  After all, they were adequately notified of the LCI's corporate rehabilitation
34

and the issuance of the corresponding Commencement Order. In sum, it was improper for
Misajon, et al. to collect, or even attempt to collect, deficiency taxes from LCI outside of the
rehabilitation proceedings concerning the latter, and in the process, willfully disregard the
Commencement Order lawfully issued by the Rehabilitation Court. Hence, the RTC Br. 35 correctly
cited them for indirect contempt.35

WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the Order dated
October 26, 2015 of the Regional Trial Court of Calamba City, Province of Laguna, Branch 35 in
Civil Case No. 4813-2014- C are hereby AFFIRMED.

SO ORDERED.
G.R. No. 187581               October 20, 2014

PHILIPPINE BANK OF COMMUNICATIONS, Petitioner,

vs.
BASIC POLYPRINTERS AND PACKAGING CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This appeal is taken from the decision promulgated on December 16, 2008 in C.A.-G.R. CV No. I
02484 entitled Philippine Bank of Communications, v. Basic Polyprinters and Packaging
Corporation,  whereby the Court of Appeals (CA) affirmed the order issued on January 11, 2008 by
1

the Regional Trial Court (RTC), Branch 21, in Imus, Cavite, viz:

WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Order dated
January 11, 2008 of the Regional Trial Court oflmus, Cavite, Branch 21, is hereby AFFIRMED.

SO ORDERED. 2

Antecedents

Respondent Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic
corporation engaged in the business of printing greeting cards, gift wrappers, gift bags, calendars,
posters, labels and other novelty items.3

On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging to the
Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International, Gibson HP
Corporation, Gibson Mega Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc.,
T.O.L. Realty & Development Corp., and Wonder Book Corporation), filed a joint petition for
suspension of paymentswith approval of the proposed rehabilitation in the RTC (docketed as SEC
Case No. 031-04).  The RTC issued a stay order, and eventually approved the rehabilitation plan,
4

but the CA reversed the RTC on October 25, 2005,  and directed the petitioning corporations tofile
5

their individual petitions for suspension of payments and rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition,  averring therein that: (a) its business
6

since incorporation had been very viable and financially profitable; (b) it had obtained loans from
various banks, and had owed accounts payable to various creditors; (c) the Asian currency crisis,
devaluation of the Philippine peso, and the current state of affairs of the Philippine economy,
coupled with: (i) high interest rates, penalties and charges by its creditors; (ii) low demand for gift
items and cards due to the economic recession and the use of cellular phones; (iii) direct competition
from stores like SM, Gaisano, Robinson and other malls; and (iv) the fire of July 19, 2002 that had
destroyed its warehouse containing inventories worth ₱264,000,000.00, resulting in difficulty of
meeting its obligations; (d) its operations would be hampered and would render rehabilitation difficult
should its creditors enforce their claims through legal actions, including foreclosure proceedings; (e)
included in its overall Rehabilitation Program was the full payment of its outstanding loans in favor of
petitioner Philippine Bank of Communications (PBCOM), RCBC, Land Bank, EPCI Bank and AUB
via repayment over 15 years with moratorium of two-years for the interestand five years for the
principal at 5% interest per annumand a dacion en pagoof its affiliate property in favor of EPCI Bank;
and (f) its assets worth ₱15,374,654.00 with net liabilities amounting to ₱13,031,438.00. 7

Finding the petition sufficient in formand substance, the RTC issued the stay order dated August 31,
2006.  It appointed Manuel N. Cacho III as the rehabilitation receiver, and required all creditors and
8

interested parties, including the Securities and Exchange Commission (SEC), to file their comments.

After the initial hearing and evaluation of the comments and opposition of the creditors, including
PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation receiver for
evaluation and recommendation. 9

On October 18, 2007, the rehabilitation receiver submitted his report recommending the approval of
the rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted his clarifications
and corrections to his report and recommendations. 10

Ruling of the RTC

On January 11, 2008, the RTC issued an order approving the rehabilitation plan,  the pertinent
11

portion of which reads:

Petitioner’s primary business is in the printing business. Based on its updated financial report, the
financial condition has greatly improved.

However, because of the indebtedness and the slowdown in sales brought about by a depressed
economy, the present income from the operations will be insufficient to pay off its maturing
obligations. Thus, the success of the rehabilitation planlargely depends on its ability to reduce its
debt obligation to a manageable level by the suspension of payments of obligations and the
proposed "dacion en pago."

The projected cash flow attached to the report and the repayment program demonstrates the ability
of the company to settle its debt liability.

Other factors which justify the approval of the Rehabilitation Plan are as follows:

1. The petitioner has a positive net worth and inventory that can be converted into resources.

2. The Plan ensures preservation of assets, optimizes recovery of creditors’ claims and
provides ofan orderly payment of debts.

3. The plan will restore petitioner to profitability and solvency and maintain it as an on-going
concern to the benefit of the stockholders, investors and creditors.

4. The rehabilitation and the continuous operation of the company will generate employment.

5. The plan is endorsed by the Rehabilitation Receiver.

CONSIDERING THE FOREGOING, the Court hereby approves the detailed Rehabilitation Plan
including the Receiver’s Report and Recommendations and its clarifications and corrections and
enjoins the petitioner to comply strictly with the provisions of the plan, perform its obligations
thereunder and take all actions necessary to carry out the plan, failing which, the Court shall either,
upon motion, motu proprio or upon the recommendation of the Rehabilitation Receiver, terminate the
proceedings pursuant to Section 27, Rule 1 of the Interim Rules of Procedure on Corporate
Rehabilitation.

The Rehabilitation Receiver is directed to strictly monitor the implementation of the Plan and submit
a quarterly report on the progress thereon.

SO ORDERED.

PBCOM appealed to the CA in due course.

Ruling of the CA

In the assailed decision promulgated on December 16, 2008,  the CA affirmed the questioned order
12

of the RTC, agreeing with the finding of the rehabilitation receiver that there were sufficient evidence,
factors and actual opportunities in the rehabilitation plan indicating that Basic Polyprinters could be
successfully rehabilitated in due time. 13

Emphasizing the equitable and rehabilitative purposes of rehabilitation proceedings, the CA stated
that Presidential Decree No. 902-A, as amended, sought to "effect a feasible and viable
rehabilitation by preserving a foundering business as going concern" because it would be more
valuable to preserve the assets of the corporation  rather than to pursue its liquidation; and
14

observed in closing:

One last word. The purpose of rehabilitation proceedings is to enable the company to gain new
lease on life and thereby allows creditors to be paid their claims from its earnings. Rehabilitation
contemplates a continuance of corporate life and activities in an effort to restore and reinstate the
financially distressed corporation to its former position of successful operation and solvency. This is
in consonance with the State’s objective to promote a wider and moremeaningful equitable
distribution of wealth to protect investments and the public. The approval of the Rehabilitation Plan
by the trial court is precisely in furtherance of the rationale behind the Interim Rules of Corporate
Rehabilitation is to effect a feasible and viable rehabilitation ofailing corporations which affect the
public welfare.15

PBCOM moved for reconsideration,  but its motion was denied.

16

Issues

Hence, this appeal by PBCOM upon the following issues, namely:

THE COURT OF APPEALS GRAVELY ERRED IN DISMISSING PETITIONER’S PETITION FOR

REVIEW AND AFFIRMING THE ORDER DATED JANUARY 11, 2008, CONSIDERING THAT:

A
A PETITION FILED PURSUANT TO THE INTERIM RULES OF PROCEDURE ON CORPORATE
REHABILITATION PRESUPPOSES THAT THE PETITIONING CORPORATION HAS SUFFICIENT
PROPERTY TO COVER ALL ITS INDEBTEDNESS. RESPONDENT IS INSOLVENT AS ITS
ASSETS ARE LESS THAN ITS OBLIGATIONS;

THE "DETAILED REHABILITATION PLAN" DOES NOT PROVIDE MATERIAL FINANCIAL

COMMITMENTS FROM RESPONDENT ITSELF OR WOULD-BE INVESTORS

THE TERMS AND CONDITIONS OF THE "APPROVED REHABILITATION PLAN" ARE TOO
ONEROUS PARTICULARLY THE REHABILITATION TERM OF FIFTEEN (15) YEARS AS WELL
AS THE "WAIVER" OF ALL INTEREST AND PENALTIES BEGINNING FEBRUARY 2004 UPTO
THE TIME OF ITS APPROVAL. 17

The petitioner claims that the CA did not pass upon the issues presented in its petition, particularly
Basic Polyprinters’ liquidity that was material in proceedings for corporate rehabilitation; that a
petition for rehabilitation presupposed that the petitioning corporation had sufficient property to cover
all its indebtedness, but Basic Polyprinters did not show so because its assets were much less
thanits outstanding obligations; that Basic Polyprinters had under-declared its outstanding loans, i.e.,
its total loan obligations with the petitioner was at ₱118,411,702.70 as of June 30, 2006, and not just
₱71,315,086.00 as it claimed; that the independent appraisal by the Professional Asset Valuers, Inc.
(PAVI) on Basic Polyprinters’ machineries and printing equipment mortgaged to it (PBCOM) had a
fair market value of only ₱6,531,000.00, and a prompt sale value of only ₱4,572,000.00, as
compared to the fair market value of ₱15,110,000.00 declared by Basic Polyprinters; that the
rehabilitation plandid not contain the material financial commitments required by Section 5, Rule 4 of
the Interim Rules of Procedure for Corporate Rehabilitation (Interim Rules); that, accordingly, the
proposed repayment scheme did not constitute a material financial commitment, and the proposed
dacion en pagowas not proper because the property subject thereof had been mortgaged in its
favor; and that the absence of capital infusion rendered impossible the proposal to invest in new
machineries that would increase sales and improve quality and capacity. 18

The petitioner posits that the assailed decision of the CA effectively gave Basic Polyprinters a
moratoriumfor seven years on both interest and principal payments counted from the issuance of the
stay order in 2004 that effectively prejudiced its creditors.
19

Basic Polyprinters refutes the petitioner, saying that the petitioner raises factual issues improper
under Rule 45 of the Rules of Court; that as long as the rehabilitation court found that the petitioning
corporation could still be rehabilitated, its findings of fact should be binding when they were
supported by substantial evidence; that the independent appraisal report by PAVI was unauthorized
by the RTC; and that the validity of the rehabilitation plan could be upheld for its complete
satisfaction of the requirements of Section 5, Rule4 of the Interim Rules.

In fine, we shall determine whether the approval of the rehabilitation plan was proper despite: (a) the
alleged insolvency of Basic Polyprinters; and (b) absence of a material financial commitment
pursuant to Section 5, Rule 4 of the Interim Rules.

Ruling
We reverse the judgment of the CA.

Liquidity was not an issue in a petition for rehabilitation

The petitioner contends that the sole issue in corporate rehabilitation is one of liquidity; hence, the
petitioning corporation should have sufficient assets to cover all its indebtedness because it only
foresees the impossibility of paying the indebtedness falling due. It claims that rehabilitation became
inappropriate because Basic Polyprinters was insolvent due to its assets being inadequate to cover
the outstanding obligations. 20

We disagree with the contention of the petitioner.

Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected in the plan
more if the corporation continues as a going concern that if it is immediately liquidated."  It21

contemplates a continuance ofcorporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency. 22

In Asiatrust Development Bank v. First Aikka Development, Inc.,  we said that rehabilitation
23

proceedings have a two-pronged purpose, namely: (a) to efficiently and equitably distribute the
assets of the insolvent debtor to its creditors; and (b) to provide the debtor with a fresh start, viz:
Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes. On the one
hand, they attempt to provide for the efficient and equitable distribution ofan insolvent debtor's
remaining assets to its creditors; and on the other, to provide debtors with a "fresh start" by relieving
them of the weight of their outstanding debts and permitting them to reorganize their affairs. The
purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and
thereby allow creditors to be paidtheir claims from its earnings. 24

Consequently, the basic issues inrehabilitation proceedings concern the viability and desirability of
continuing the business operations of the petitioning corporation. The determination of such issues
was to be carried out by the court-appointed rehabilitation receiver,  who was Cacho in this case.
25

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA) of 2010), a
law that is applicable hereto,  has defined a corporate debtor as a corporation duly organized and
26

existing under Philippine laws that has become insolvent.  The term insolventis defined in Republic
27

Act No. 10142 as "the financial condition of a debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its
or his assets."28

As such, the contention that rehabilitation becomes inappropriate because of the perceived
insolvency of BasicPolyprinters was incorrect.

II

A material financial commitment is significant in a rehabilitation plan

The petitioner next argues that Basic Polyprinters did not present any material financial commitment
in the rehabilitation plan, thereby violating Section 5, Rule 4 of the Interim Rules, the rule applicable
at the time of the filing of the petition for rehabilitation. In that regard, Basic Polyprinters made no
commitment in relation to the infusion of fresh capital by its stakeholders,  and presented only a
29

"lopsided" protracted repayment schedule that included the dacion en pago involving an asset
mortgaged to the petitioner itself in favor of another creditor.

A material financial commitment becomes significant in gauging the resolve, determination,

earnestness and good faith ofthe distressed corporation in financing the proposed rehabilitation
plan.  This commitment may include the voluntary undertakings ofthe stockholders or the would-be
30

investors of the debtor-corporation indicating their readiness, willingness and ability to contribute
funds or property to guarantee the continued successful operation of the debtor corporation during
the period of rehabilitation. 31

Basic Polyprinters presented financial commitments, as follows:

(a) Additional ₱10 million working capital to be sourced from the insurance claim;

(b) Conversion of the directors’ and shareholders’ deposit for future subscription to common
stock;32

(c) Conversion of substituted liabilities, if any, to additional paid-in capital to increase the
company’s equity; and

(d) All liabilities (cash advances made by the stockholders) of the company from the officers
and stockholders shall be treated as trade payables. 33

However, these financial commitments were insufficient for the purpose.  We explain. 1âwphi1

The commitment to add ₱10,000,000.00 working capital appeared to be doubtful considering that
the insurance claim from which said working capital would be sourced had already been written-off
by Basic Polyprinters’s affiliate, Wonder Book Corporation.  A claim that has been written-off is
34

considered a bad debt or a worthless asset,  and cannot be deemed a material financial
35

commitment for purposes of rehabilitation. At any rate, the proposed additional ₱10,000,000.00
working capital was insufficient to cover at least half ofthe shareholders’ deficit that amounted to
₱23,316,044.00 as of June 30, 2006.

We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder

Book)  that the conversion of all deposits for future subscriptions to common stock and the treatment
36

of all payables to officers and stockholders as trade payables was hardly constituting material
financial commitments. Such "conversion" of cash advances to trade payables was, in fact, a mere
re-classification of the liability entry and had no effect on the shareholders’ deficit. On the other
hand, we cannot determine the effect of the "conversion"of the directors’ and shareholders’ deposits
for future subscription to common stock and substituted liabilities on the shareholders’ deficit
because their amounts were not reflected in the financial statements contained in the rollo.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to
address the low demands for their products and the effect of direct competition from stores like SM,
Gaisano, Robinsons, and other malls. Even the ₱245 million insurance claim that was supposed to
cover the destroyed inventories worth ₱264 million appears to have been written-off with no
probability of being realized later on.
We observe, too, that Basic Polyprinters’s proposal to enter into the dacion en pagoto create a
source of "fresh capital" was not feasible because the object thereof would not be its own property
but one belonging to its affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation. Moreover, the negotiations (for the return of books and magazines from
Basic Polyprinters’s trade creditors) did not partake of a voluntary undertaking because no actual
financial commitments had been made thereon.

Worthy of note here is that Wonder Book Corporation was a sister company of Basic Polyprinters,
being one of the corporations that had filed the joint petition for suspension of payments and
rehabilitation in SEC Case No. 031-04 adverted to earlier. Both of them submitted identical
commitments in their respective rehabilitation plans. As a result, as the Court observed in Wonder
Book,  the commitments by Basic Polyprinters could not be considered as firm assurances that
37

could convince creditors, future investors and the general public of its financial and operational
viability.

Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation

proceedings,  Basic Polyprinters was expected to exert a conscious effort in formulating the same,
38

for such plan would spell the future not only for itself but also for its creditors and the public in
general. The contents and execution of the rehabilitation plan could not be taken lightly. We are not
oblivious to the plight of corporate debtors like Basic Polyprinters that have inevitably fallen prey to
economic recession and unfortunate incidents in the course of their operations. However, we must
endeavor to balance the interests of all the parties that had a stake in the success of rehabilitating
the debtors. In doing so here, we cannot now find the rehabilitation plan for Basic Polyprinters to be
genuine and in good faith, for it was, in fact, unilateral and detrimental to its creditors and the public.

ACCORDINGLY, the Court GRANTS the petition for review on certiorari; SETS ASIDE and
REVERSES the decision promulgated on December 16, 2008 and the resolution promulgated on
April 22, 2009, both by the Court of Appeals, as well as the order issued on January 11, 2008 by the
Regional Trial Court approving the rehabilitation plan submitted by Basic Polyprinters and Packaging
Corporation; DISMISSES the petition for suspension of payments and rehabilitation of Basic
Polyprinters and Packaging Corporation; and DIRECTS Basic Polyprinters and Packaging
Corporation to pay the costs of suit.

SO ORDERED.
G.R. No. 151098             March 21, 2006

ERLINDA GAJUDO, FERNANDO GAJUDO, JR., ESTELITA GAJUDO, BALTAZAR GAJUDO and
DANILO ARAHAN CHUA, Petitioners,
vs.
TRADERS ROYAL BANK,1Respondent.

DECISION

PANGANIBAN, CJ:

The mere fact that a defendant is declared in default does not automatically result in the grant of the
prayers of the plaintiff. To win, the latter must still present the same quantum of evidence that would
be required if the defendant were still present. A party that defaults is not deprived of its rights,
except the right to be heard and to present evidence to the trial court. If the evidence presented does
not support a judgment for the plaintiff, the complaint should be dismissed, even if the defendant
may not have been heard or allowed to present any countervailing evidence.

The Case

Before us is a Petition for Review2 under Rule 45 of the Rules of Court, assailing the June 29, 2001
Decision3 and December 6, 2001 Resolution4 of the Court of Appeals (CA) in CA-GR CV No. 43889.
The CA disposed as follows:

"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the partial judgment appealed from, must be,
as it hereby is, VACATED and SET ASIDE, and another one entered DISMISSING the complaint at
bench. Without costs."5

The assailed Resolution denied petitioners’ Motion for Reconsideration6 for lack of merit.

The Facts

The CA narrated the facts as follows:

"[Petitioners] filed a complaint before the Regional Trial Court of Quezon City, Branch 90, against
[respondent] Traders Royal Bank, the City Sheriff of Quezon City and the Register of Deeds of
Quezon City. Docketed thereat as Civil Case No. Q-41203, the complaint sought the annulment of
the extra-judicial foreclosure and auction sale made by [the] city sheriff of Quezon City of a parcel of
land covered by TCT No. 16711 of the Register of Deeds of Quezon City, the conventional
redemption thereof, and prayed for damages and the issuance of a writ of preliminary injunction.

"The complaint alleged that in mid 1977[, Petitioner] Danilo Chua obtained a loan from [respondent]
bank in the amount of P75,000.00 secured by a real estate mortgage over a parcel of land covered
by TCT No. 16711, and owned in common by the [petitioners]; that when the loan was not paid,
[respondent] bank commenced extra-judicial foreclosure proceedings on the property; that the
auction sale of the property was set on 10 June 1981, but was reset to 31 August 1981, on
[Petitioner Chua’s] request, which, however, was made without the knowledge and conformity of the
other [petitioners]; that on the re-scheduled auction sale, [the] Sheriff of Quezon City sold the
property to the [respondent] bank, the highest bidder therein, for the sum of P24,911.30; that the
auction sale was tainted with irregularity because, amongst others, the bid price was shockingly or
unconscionably, low; that the other [petitioners] failed to redeem the property due to their lack of
knowledge of their right of redemption, and want of sufficient education; that, although the period of
redemption had long expired, [Petitioner] Chua offered to buy back, and [respondent] bank also
agreed to sell back, the foreclosed property, on the understanding that Chua would pay [respondent]
bank the amount of P40,135.53, representing the sum that the bank paid at the auction sale, plus
interest; that [Petitioner] Chua made an initial payment thereon in the amount of P4,000.00, covered
by Interbank Check No. 09173938, dated 16 February 1984, duly receipted by [respondent] bank;
that, in a sudden change of position, [respondent] bank wrote Chua, on 20 February 1984, asking
that he could repurchase the property, but based on the current market value thereof; and that
sometime later, or on 22 March 1984, [respondent] bank wrote Chua anew, requiring him to tender a
new offer to counter the offer made thereon by another buyer.

"Traversing [petitioners’] complaint, [respondent] bank, upon 05 July 1984, filed its answer with
counterclaim, thereunder asserting that the foreclosure sale of the mortgaged property was done in
accordance with law; and that the bid price was neither unconscionable, nor shockingly low; that
[petitioners] slept on their rights when they failed to redeem the property within the one year
statutory period; and that [respondent] bank, in offering to sell the property to [Petitioner] Chua on
the basis of its current market price, was acting conformably with law, and with legitimate banking
practice and regulations.

"Pre-trial having been concluded, the parties entered upon trial, which dragged/lengthened to
several months due to postponements. Upon 11 June 1988, however, a big conflagration hit the City
Hall of Quezon City, which destroyed, amongst other things, the records of the case. After the
records were reconstituted, [petitioners] discovered that the foreclosed property was sold by
[respondent] bank to the Ceroferr Realty Corporation, and that the notice of lis pendens annotated
on the certificate of title of the foreclosed property, had already been cancelled. Accordingly,
[petitioners], with leave of court, amended their complaint, but the Trial Court dismissed the case
‘without prejudice’ due to [petitioners’] failure to pay additional filing fees.

"So, upon 11 June 1990, [petitioners] re-filed the complaint with the same Court, whereat it was
docketed as Civil Case No. 90-5749, and assigned to Branch 98: the amended complaint
substantially reproduced the allegations of the original complaint. But [petitioners] this time
impleaded as additional defendants the Ceroferr Realty Corporation and/or Cesar Roque, and Lorna
Roque, and included an additional cause of action, to wit: that said new defendants conspired with
[respondent] bank in [canceling] the notice of lis pendens by falsifying a letter sent to and filed with
the office of the Register of Deeds of Quezon City, purportedly for the cancellation of said notice.

"Summons was served on [respondent] bank on 26 September 1990, per Sheriff’s Return dated 08
October 1990. Supposing that all the defendants had filed their answer, [petitioners] filed, on 23
October 1991, a motion to set case for pre-trial, which motion was, however, denied by the Trial
Court in its Order of 25 October 1991, on the ground that [respondent] bank has not yet filed its
answer. On 13 November 1991[, petitioners] filed a motion for reconsideration, thereunder alleging
that they received by registered mail, on 19 October 1990, a copy of [respondent] bank’s answer
with counterclaim, dated 04 October 1990, which copy was attached to the motion. In its Order of 14
November 1991, the trial Court denied for lack of merit, the motion for reconsideration, therein
holding that the answer with counterclaim filed by [respondent] bank referred to another civil case
pending before Branch 90 of the same Court.

"For this reason, [petitioners] filed on 02 December 1991 a motion to declare [respondent] bank in
default, thereunder alleging that no answer has been filed despite the service of summons on it on
26 September 1990.

"On 13 December 1991, the Trial Court declared the motion submitted for resolution upon
submission by [petitioners] of proof of service of the motion on [respondent] bank.

"Thus, on 16 January 1992, upon proof that [petitioners] had indeed served [respondent] bank with a
copy of said motion, the Trial Court issued an Order of default against [respondent] bank.

"Upon 01 December 1992, on [petitioners’] motion, they were by the Court allowed to present
evidence ex parte on 07 January 1993, insofar as [respondent] bank was concerned.

"Thereafter, or on 08 February 1993, the Trial Court rendered the new questioned partial decision.7

"Aggrieved, [respondent] bank filed a motion to set aside [the] partial decision by default against
Traders Royal Bank and admit [respondent] Traders Royal Bank’s x x x Answer with counterclaim:
thereunder it averred, amongst others, that the erroneous filing of said answer was due to an honest
mistake of the typist and inadvertence of its counsel.

"The [trial court] thumbed down the motion in its Order of 26 July 1993."8

Respondent bank appealed the Partial Decision9 to the CA. During the pendency of that appeal,
Ceroferr Realty Corporation and/or Cesar and/or Lorna Roque filed a Manifestation with
Motion10 asking the CA to discharge them as parties, because the case against them had already
been dismissed on the basis of their Compromise Agreement11 with petitioners. On May 14, 1996,
the CA issued a Resolution12 granting Ceroferr et al.’s Manifestation with Motion to discharge
movants as parties to the appeal. The Court, though, deferred resolution of the matters raised in the
Comment13 of respondent bank. The latter contended that the Partial Decision had been novated by
the Compromise Agreement, whose effect of res judicata had rendered that Decision functus officio.

Ruling of the Court of Appeals

The CA ruled in favor of respondent bank. Deemed, however, to have rested on shaky ground was
the latter’s "Motion to Set Aside Partial Decision by Default Against Traders Royal Bank and Admit
Defendant Traders Royal Bank’s Answer."14 The reasons offered by the bank for failing to file an
answer were considered by the appellate court to be "at once specious, shallow and sophistical and
can hardly be dignified as a ‘mistake’ or ‘excusable negligence,’ which ordinary prudence could not
have guarded against."15

In particular, the CA ruled that the erroneous docket number placed on the Answer filed before the
trial court was not an excusable negligence by the bank’s counsel. The latter had a bounden duty to
be scrupulously careful in reviewing pleadings. Also, there were several opportunities to discover
and rectify the mistake, but these were not taken. Moreover, the bank’s Motion to Set Aside the
Partial Decision and to Admit [the] Answer was not accompanied by an affidavit of merit. These
mistakes and the inexcusable negligence committed by respondent’s lawyer were binding on the
bank.
On the issue of whether petitioners had convincingly established their right to relief, the appellate
court held that there was no ground to invalidate the foreclosure sale of the mortgaged property.
First, under Section 3 of Act No. 3135, an extrajudicial foreclosure sale did not require personal
notice to the mortgagor. Second, there was no allegation or proof of noncompliance with the
publication requirement and the public posting of the notice of sale, provided under Act No. 3135, as
amended. Third, there was no showing of inadequacy of price as no competent evidence was
presented to show the real market value of the land sold or the readiness of another buyer to offer a
price higher than that at which the property had been sold.

Moreover, petitioners failed to prove that the bank had agreed to sell the property back to them. After
pointing out that the redemption period had long expired, respondent’s written communications to
Petitioner Chua only showed, at most, that the former had made a proposal for the latter to buy back
the property at the current market price; and that Petitioner Chua was requested to make an offer to
repurchase the property, because another buyer had already made an offer to buy it. On the other
hand, respondent noted that the Interbank check for P4,000 was for "deposit only." Thus, there was
no showing that the check had been issued to cover part of the repurchase price.

The appellate court also held that the Compromise Agreement had not resulted in the novation of
the Partial Decision, because the two were not incompatible. In fact, the bank was not even a party
to the Agreement. Petitioners’ recognition of Ceroferr’s title to the mortgaged property was intended
to preclude future litigation against it.

Hence this Petition.16

Issues

In their Memorandum, petitioners raise the following issues:

"1. Whether or not the Respondent Court of Appeals erred in failing to apply the provisions of
Section 3, Rule 9 of the 1997 Rules of Civil Procedure [and in applying instead] the rule on
preponderance of evidence under Section 1, Rule 133 of the Rules of Court.

"2. Whether or not the respondent appellate court failed to apply the conventional redemption rule
provided for under Article 1601 of the New Civil Code.

"3. Whether or not this Honorable Court can exercise its judicial prerogative to evaluate the findings
of facts."17

The first issue is one of law and may be taken up by the Court without hindrance, pursuant to
Section 1 of Rule 45 of the Rules of Court.18 The second and the third issues, however, would entail
an evaluation of the factual findings of the appellate court, a function ordinarily not assumed by this
Court, unless in some excepted cases. The Court will thus rule on the first issue before addressing
the second and the third issues jointly.

The Court’s Ruling

The Petition has no merit.

First Issue:
Quantum of Proof
Petitioners challenge the CA Decision for applying Section 3 of Rule 9 of the Rules of Court, rather
than Section 1 of Rule 133 of the same Rules. In essence, petitioners argue that the quantum of
evidence for judgments flowing from a default order under Section 3 of Rule 9 is not the same as
that provided for in Section 1 of Rule 133.

For ease of discussion, these two rules will be reproduced below, starting with Section 3 of Rule 9 of
the Rules of Court:

"Sec. 3. Default; declaration of. – If the defending party fails to answer within the time allowed
therefor, the court shall, upon motion of the claiming party with notice to the defending party, and
proof of such failure, declare the defending party in default. Thereupon, the court shall proceed to
render judgment granting the claimant such relief as his pleading may warrant, unless the court in its
discretion requires the claimant to submit evidence. Such reception of evidence may be delegated to
the clerk of court.

"(a) Effect of order of default. – A party in default shall be entitled to notice of subsequent

proceedings but not to take part in the trial.

"(b) Relief from order of default. – A party declared in default may at any time after notice
thereof and before judgment file a motion under oath to set aside the order of default upon
proper showing that his failure to answer was due to fraud, accident, mistake or excusable
negligence and that he has a meritorious defense. In such case, the order of default may be
set aside on such terms and conditions as the judge may impose in the interest of justice.

"(c) Effect of partial default. – When a pleading asserting a claim states a common cause of
action against several defending parties, some of whom answer and the others fail to do so,
the court shall try the case against all upon the answers thus filed and render judgment upon
the evidence presented.

"(d) Extent of relief to be awarded. – A judgment rendered against a party in default shall not
exceed the amount or be different in kind from that prayed for nor award unliquidated
damages.

"(e) Where no defaults allowed. – If the defending party in an action for annulment or

declaration of nullity of marriage or for legal separation fails to answer, the court shall order
the prosecuting attorney to investigate whether or nor a collusion between the parties exists,
and if there is no collusion, to intervene for the State in order to see to it that the evidence
submitted is not fabricated."

We now quote Section 1 of Rule 133:

"SECTION 1. Preponderance of evidence, how determined. – In civil cases, the party having the
burden of proof must establish his case by a preponderance of evidence. In determining where the
preponderance or superior weight of evidence on the issues involved lies, the court may consider all
the facts and circumstances of the case, the witnesses’ manner of testifying, their intelligence, their
means and opportunity of knowing the facts to which they are testifying, the nature of the facts to
which they testify, the probability or improbability of their testimony, their interest or want of interest,
and also their personal credibility so far as the same may legitimately appear upon the trial. The
court may also consider the number of witnesses, though the preponderance is not necessarily with
the greater number."
Between the two rules, there is no incompatibility that would preclude the application of either one of
them. To begin with, Section 3 of Rule 9 governs the procedure which the trial court is directed to
take when a defendant fails to file an answer. According to this provision, the court "shall proceed to
render judgment granting the claimant such relief as his pleading may warrant," subject to the court’s
discretion on whether to require the presentation of evidence ex parte. The same provision also sets
down guidelines on the nature and extent of the relief that may be granted. In particular, the court’s
judgment "shall not exceed the amount or be different in kind from that prayed for nor award
unliquidated damages."

As in other civil cases, basic is the rule that the party making allegations has the burden of proving
them by a preponderance of evidence.19 Moreover, parties must rely on the strength of their own
evidence, not upon the weakness of the defense offered by their opponent.20 This principle holds
true, especially when the latter has had no opportunity to present evidence because of a default
order. Needless to say, the extent of the relief that may be granted can only be as much as has been
alleged and proved21 with preponderant evidence required under Section 1 of Rule 133.

Regarding judgments by default, it was explained in Pascua v. Florendo22 that complainants are not
automatically entitled to the relief prayed for, once the defendants are declared in default. Favorable
relief can be granted only after the court has ascertained that the relief is warranted by the evidence
offered and the facts proven by the presenting party. In Pascua, this Court ruled that "x x x it would
be meaningless to require presentation of evidence if every time the other party is declared in
default, a decision would automatically be rendered in favor of the non-defaulting party and exactly
according to the tenor of his prayer. This is not contemplated by the Rules nor is it sanctioned by the
due process clause."23

The import of a judgment by default was further clarified in Lim Tanhu v. Ramolete.24 The following
disquisition is most instructive:

"Unequivocal, in the literal sense, as these provisions [referring to the subject of default then under
Rule 18 of the old Rules of Civil Procedure] are, they do not readily convey the full import of what
they contemplate. To begin with, contrary to the immediate notion that can be drawn from their
language, these provisions are not to be understood as meaning that default or the failure of the
defendant to answer should ‘be interpreted as an admission by the said defendant that the plaintiff’s
cause of action find support in the law or that plaintiff is entitled to the relief prayed for.’ x x x.

xxxxxxxxx

"Being declared in default does not constitute a waiver of rights except that of being heard and of
presenting evidence in the trial court. x x x.

"In other words, a defaulted defendant is not actually thrown out of court. While in a sense it may be
said that by defaulting he leaves himself at the mercy of the court, the rules see to it that any
judgment against him must be in accordance with law. The evidence to support the plaintiff’s cause
is, of course, presented in his absence, but the court is not supposed to admit that which is basically
incompetent. Although the defendant would not be in a position to object, elementary justice requires
that only legal evidence should be considered against him. If the evidence presented should not be
sufficient to justify a judgment for the plaintiff, the complaint must be dismissed. And if an
unfavorable judgment should be justifiable, it cannot exceed in amount or be different in kind from
what is prayed for in the complaint."25

In sum, while petitioners were allowed to present evidence ex parte under Section 3 of Rule 9, they
were not excused from establishing their claims for damages by the required quantum of proof under
Section 1 of Rule 133. Stated differently, any advantage they may have gained from the ex parte
presentation of evidence does not lower the degree of proof required. Clearly then, there is no
incompatibility between the two rules.

Second and Third Issues:

Review of the Evidence

Petitioners urge this Court to depart from the general rule that the lower courts’ findings of fact are
not reviewable in a petition for review.26 In support of their plea, they cite the conflicting findings of
the trial and the appellate courts, as well as the alleged conjectures and surmises made by the CA in
arriving at its Decision.

Indeed, the differences between the findings of the two courts a quo, leading to entirely disparate
dispositions, is reason enough for this Court to review the evidence in this case.27 Whether the CA
indulged in surmises and conjectures when it issued the assailed Decision will thus be determined.

At the outset, it behooves this Court to clarify the CA’s impression that no evidence was presented in
the case which might have contributed to petitioners’ challenge to its Decision. The appellate court’s
observation was based on the notation by the lower court’s clerk of court that there were no separate
folders for exhibits and transcripts, because "there was no actual hearing conducted in this case."28

True, there was no hearing conducted between petitioners and respondent, precisely because the
latter had been declared in default, and petitioners had therefore been ordered to present their
evidence ex parte. But the absence of a hearing did not mean that no evidence was presented. The
Partial Decision dated February 8, 1993, in fact clearly enumerated the pieces of evidence adduced
by petitioners during the ex parte presentation on January 7, 1993. The documentary evidence they
presented consisted of the following:

1. A copy of respondent bank’s Petition for the extrajudicial foreclosure and auction sale of
the mortgaged parcel of land29

2. The Certificate of Sale that was a consequence of the foreclosure sale30

3. A Statement of Account dated February 15, 1984, showing Petitioner Chua’s outstanding
debt in the amount of P40,135.5331

4. A copy of the Interbank check dated February 16, 1984, in the amount of P4,00032

5. The Official Receipt issued by the bank acknowledging the check33

6. The bank’s letter dated February 20, 1984, advising Petitioner Chua of the sale of the
property at an extrajudicial public auction; the lapse of the period of redemption; and an
invitation to purchase the property at its current market price34

7. Another letter from the bank dated March 22, 1984, inviting Petitioner Chua to submit,
within five days, an offer to buy the same property, which another buyer had offered to buy35

8. A copy of the Notice of Lis Pendens, the filing of which was done after that of the
Amended Complaint36

9. A copy of the title showing the inscription of the Notice of Lis Pendens37
 10. A copy of the Absolute Deed of Sale to Cerrofer38

11. A copy of a letter dated August 29, 1986, made and signed by petitioners’ counsel,
requesting the cancellation of the Notice of Lis Pendens39

12. A copy of a page of the Memorandum of Encumbrance from TCT No. (314341) 7778/T-
3940

Having clarified this matter, we proceed to review the facts.

Petitioners do not deny that the one-year period for legal redemption had already lapsed when
respondent bank supposedly offered to sell the property in question. The records clearly show that
the Certificate of Sale following the extrajudicial public auction of the property was registered on
June 21, 1982, the date from which the legal redemption period was to be reckoned.41 Petitioners
insist, though, that they had the right to repurchase the property through conventional redemption,
as provided under Article 1601 of the Civil Code, worded as follows:

"ART. 1601. Conventional redemption shall take place when the vendor reserves the right to
repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other
stipulations which may have been agreed upon."

It is true that the one-year period of redemption provided in Act No. 3135, as amended -- the law
under which the property here was sold in a foreclosure sale -- is only directory and, as such can be
extended by agreement of the parties.42 However, it has also been held that for legal redemption to
be converted into conventional redemption, two requisites must be established: 1) voluntary
agreement of the parties to extend the redemption period; and 2) the debtor’s commitment to pay the
redemption price on a fixed date.43 Thus, assuming that an offer was made to Petitioner Chua to buy
back the property after the lapse of the period of legal redemption, petitioners needed to show that
the parties had agreed to extend the period, and that Petitioner Chua had committed to pay the
redemption price on a fixed date.

The letters sent by the bank to Petitioner Chua on February 20 and March 22, 1984, do not
convincingly show that the parties arrived at a firm agreement for the repurchase of the property.
What can be gleaned from the February 20 letter is that Petitioner Chua proposed to pay the
redemption price for the property, but that the bank refused to accede to his request, because the
one-year redemption period had already lapsed.44 The bank, though, had offered to sell back the
property to him at the current market value. Indeed, an examination of his earlier letter of February
17, 1984, readily reveals that he expressed willingness to settle his account with the bank, but that
his "present financial situation precludes [him] from effecting an immediate settlement x x x."45

On the other hand, the letter dated March 22, 1984, clearly states that "x x x the Bank rejected [his]
request to redeem said property due to [the] lapse of [the] one (1) year legal redemption
period."46 Nonetheless, he was "[invited] to submit an offer to buy the same property in five (5) days
from receipt [of the letter]."47 Petitioner Chua was also informed that the bank had received an offer
to purchase the foreclosed property. As to the P4,000 check enclosed in his proposal dated
February 17, 1984, as a token of his good faith, he was advised that the amount was still
outstanding in the books of the bank and could be claimed by him if he thought the invitation was not
feasible.

More important, there was no showing that petitioners had committed to pay the redemption price on
a fixed date. True, Petitioner Chua had attempted to establish a previous agreement to repurchase
the property for less than its fair market value. He had submitted in evidence a Statement of
Account48 dated February 15, 1984, showing a balance of P40,135.53; the Interbank check dated
February 16, 1984 , for P4,000, which was deposited to the account of respondent bank;49 and the
Official Receipt for the check.50

Granting that these documents evinced an agreement, petitioners were still unable to establish a
firm commitment on their part to pay the redemption price on a fixed date. On the contrary, the
February 17 letter of Petitioner Chua to the bank clearly manifested that he was not capable of
paying the account immediately. For this reason, he proposed to pay in "three or four installments"
without a specification of dates for the payments, but with a plea for a reduction of the interest
charges. That proposal was rejected.

Indeed, other than the Interbank check marked "for deposit" by respondent bank, no other evidence
was presented to establish that petitioners had offered to pay the alleged redemption price
of P40,135.53 on a fixed date. For that matter, petitioners have not shown that they tendered
payment of the balance and/or consigned the payment to the court, in order to fulfill their part of the
purported agreement. These remedies are available to an aggrieved debtor under Article 1256 of the
Civil Code,51 when the creditor unjustly refuses to accept the payment of an obligation.

The next question that presents itself for resolution is the propriety of the CA’s ruling vacating the
Partial Decision of the regional trial court (RTC) and dismissing the case. To recall, the RTC had
resolved to withhold a ruling on petitioners’ right to redeem conventionally and/or order the
reconveyance of the property in question, pending a determination of the validity of the sale to
Cerrofer Realty Corporation and Spouses Cesar and Lorna Roque. The trial court, however, granted
the prayer for damages against respondent bank. The RTC ruled as follows:

"The evidence presented by [petitioners] in so far as the cause of action against [respondent]
Traders Royal Bank is concerned are preponderant to support the claims of the [petitioners].
However, in view of the fact that the property subject matter of this case has already been conveyed
to defendant Cerrofer Realty Corporation thus the issue as to whether or not the said conveyance or
sale is valid is sill pending between the [petitioners] and [respondents] Cerrofer Realty Corporation
and Cesar Roque and Lorna Roque. Hence, this Court resolves to grant the prayer for damages
against Traders Royal Bank.

"The claims of the [petitioners] as against [respondent] Traders Royal Bank having been established
and proved by evidence, judgment is hereby rendered ordering [respondent] Traders Royal Bank to
pay [petitioners] actual damage or the market value of the land in question in the sum
of P500,000.00; the sum of P70,000.00 as compensatory damages; the sum of P200,000.00 to the
heirs of [petitioner] Danilo Chua; and attorney’s fees in the sum of P30,000.00."52

In the light of the pending issue as to the validity of the sale of the property to the third parties
(Cerrofer Realty Corporation and Spouses Roque), the trial court properly withheld judgment on the
matter and thus left the prayer for damages as the sole issue for resolution.

To adjudge damages, paragraph (d) of Section 3 of Rule 9 of the Rules of Court provides that a
judgment against a party in default "shall not exceed the amount or be different in kind from that
prayed for nor award unliquidated damages." The proscription against the award of unliquidated
damages is significant, because it means that the damages to be awarded must be proved
convincingly, in accordance with the quantum of evidence required in civil cases.

Unfortunately for petitioners, the grant of damages was not sufficiently supported by the evidence for
the following reasons.
First, petitioners were not deprived of their property without cause. As correctly pointed out by the
CA, Act No. 3135, as amended, does not require personal notice to the mortgagor.53 In the present
case, there has been no allegation -- much less, proof -- of noncompliance with the requirement of
publication and public posting of the notice of sale, as required by Áct No. 3135. Neither has there
been competent evidence to show that the price paid at the foreclosure sale was inadequate.54 To be
sure, there was no ground to invalidate the sale.

Second, as previously stated, petitioners have not convincingly established their right to damages on
the basis of the purported agreement to repurchase. Without reiterating our prior discussion on this
point, we stress that entitlement to actual and compensatory damages must be proved even under
Section 3 of Rule 9 of the Rules of Court. The same is true with regard to awards for moral damages
and attorney’s fees, which were also granted by the trial court.

In sum, petitioners have failed to convince this Court of the cogency of their position, notwithstanding
the advantage they enjoyed in presenting their evidence ex parte. Not in every case of default by the
defendant is the complainant entitled to win automatically.

WHEREFORE, this Petition is hereby DENIED and the assailed Decision and Resolution
AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. 174436               January 23, 2013

JUANITA ERMITAÑO, represented by her Attorney-in-Fact, ISABELO ERMITAÑO, Petitioner,

vs.
LAILANIE M. PAGLAS, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to
reverse and set aside the Decision1 and Resolution2 dated September 8, 2004 and August 16, 2006,
respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 77617.

On November 5, 1999, herein respondent and petitioner, through her representative, lsabelo R.
Ermitaño, executed a Contract of Lease wherein petitioner leased in favor of respondent a 336
square meter residential lot and a house standing thereon located at No. 20 Columbia St., Phase l,
Doña Vicenta Village, Davao City. The contract period is one (1) year, which commenced on
November 4, 1999, with a monthly rental rate of ₱13,500.00. Pursuant to the contract, respondent
paid petitioner ₱2,000.00 as security deposit to answer for unpaid rentals and damage that may be
cause to the leased unit.

Subsequent to the execution of the lease contract, respondent received information that sometime in
March 1999, petitioner mortgaged the subject property in favor of a certain Charlie Yap (Yap) and
that the same was already foreclosed with Yap as the purchaser of the disputed lot in an extra-
judicial foreclosure sale which was registered on February 22, 2000. Yap's brother later offered to
sell the subject property to respondent. Respondent entertained the said offer and negotiations
ensued. On June 1, 2000, respondent bought the subject property from Yap for ₱950,000.00. A
Deed of Sale of Real Property was executed by the parties as evidence of the contract. However, it
was made clear in the said Deed that the property was still subject to petitioner's right of redemption.

Prior to respondent's purchase of the subject property, petitioner filed a suit for the declaration of
nullity of the mortgage in favor of Yap as well as the sheriff's provisional certificate of sale which was
issued after the disputed house and lot were sold on foreclosure.

Meanwhile, on May 25, 2000, petitioner sent a letter demanding respondent to pay the rentals which
are due and to vacate the leased premises. A second demand letter was sent on March 25, 2001.
Respondent ignored both letters.

On August 13, 2001, petitioner filed with the Municipal Trial Court in Cities (MTCC), Davao City, a
case of unlawful detainer against respondent.
In its Decision dated November 26, 2001, the MTCC, Branch 6, Davao City dismissed the case filed
by petitioner and awarded respondent the amounts of ₱25,000.00 as attorney's fees and ₱2,000.00
as appearance fee.

Petitioner filed an appeal with the Regional Trial Court (RTC) of Davao City.

On February 14, 2003, the RTC rendered its Decision, the dispositive portion of which reads as
follows:

WHEREFORE, PREMISES CONSIDERED, the assailed Decision is AFFIRMED with

MODIFICATION. AFFIRMED insofar as it dismissed the case for unlawful detainer but modified in
that the award of attorney's fees in defendant's herein respondent's favor is deleted and that the
defendant respondent is ordered to pay plaintiff herein petitioner the equivalent of ten months unpaid
rentals on the property or the total sum of ₱135,000.00.

SO ORDERED.3

The RTC held that herein respondent possesses the right to redeem the subject property and that,
pending expiration of the redemption period, she is entitled to receive the rents, earnings and
income derived from the property.

Aggrieved by the Decision of the RTC, petitioner filed a petition for review with the CA.

On September 8, 2004, the CA rendered its assailed Decision disposing, thus:

WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court, Branch 16,
11th Judicial Region, Davao City is AFFIRMED with the MODIFICATIONS as follows:

(a) Private respondent's obligation to pay the petitioner the amount of ONE HUNDRED
THIRTY-FIVE THOUSAND PESOS (₱135,000.00) equivalent of ten (10) months is hereby
DELETED;

(b) Attorney's fees and litigation expenses were correctly awarded by the trial court having
compelled the private respondent to litigate and incur expenses to protect her interests by
reason of the unjustified act of petitioner (Producers Bank of the Philippines vs. Court of
Appeals, 365 SCRA 326), Thus: litigation expenses of only TEN THOUSAND PESOS
(₱10,000.00) not TWENTY-FIVE THOUSAND PESOS (₱25,000.00); and

(c) Attorney's fees REI NSTAT ED in the amount of TEN THOUSAND PESOS (₱10,000.00)
instead of only TWO THOUSAND PESOS (₱2,000.00).

SO ORDERED.4

Quoting extensively from the decision of the MTCC as well as on respondent's comment on the
petition for review, the CA ruled that respondent did not act in bad faith when she bought the
property in question because she had every right to rely on the validity of the documents evidencing
the mortgage and the foreclosure proceedings.

Petitioner filed a Motion for Reconsideration, but the CA denied it in its Resolution dated August 16,
2006.
Hence, the instant petition for review on certiorari raising the following assignment of errors:

A.WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISMISSING THE

UNLAWFUL DETAINER CASE BY RULING THAT A SHERIFF'S FINAL CERTIFICATE OF
SALE WAS ALREADY ISSUED WHICH DECISION IS NOT BASED ON THE EVIDENCE
AND IN ACCORDANCE WITH THE APPLICABLE LAWS AND JURISPRUDENCE.

B. WHETHER OR NOT THE COURT OF APPEALS ERRED WHEN IT RULED THAT

PRIVATE RESPONDENT WAS A BUYER IN GOOD FAITH EVEN IF SHE WAS
INFORMED BY PETITIONER THROUGH A LETTER ADVISING HER THAT THE REAL
ESTATE MORTGAGE CONTRACT WAS SHAM, FICTITIOUS AS IT WAS A PRODUCT OF
FORGERY BECAUSE PETITIONER'S PURPORTED SIGNATURE APPEARING THEREIN
WAS SIGNED AND FALSIFIED BY A CERTAIN ANGELA CELOSIA.

C. WHETHER OR NOT THE COURT OF APPEALS ERRED WHEN IT AWARDED

ATTORNEY'S FEES WHICH WAS DELETED BY RTC-BRANCH 16 OF DAVAO CITY
DESPITE THE ABSENCE OF ANY EXPLANATION AND/OR JUSTIFICATION IN THE
BODY OF THE DECISION.5

At the outset, it bears to reiterate the settled rule that the only question that the courts resolve in
ejectment proceedings is: who is entitled to the physical possession of the premises, that is, to the
possession de facto and not to the possession de jure.6 It does not even matter if a party's title to the
property is questionable.7 In an unlawful detainer case, the sole issue for resolution is the physical or
material possession of the property involved, independent of any claim of ownership by any of the
party litigants.8 Where the issue of ownership is raised by any of the parties, the courts may pass
upon the same in order to determine who has the right to possess the property.9 The adjudication is,
however, merely provisional and would not bar or prejudice an action between the same parties
involving title to the property.10

In the instant case, pending final resolution of the suit filed by petitioner for the declaration of nullity
of the real estate mortgage in favor of Yap, the MTCC, the RTC and the CA were unanimous in
sustaining the presumption of validity of the real estate mortgage over the subject property in favor
of Yap as well as the presumption of regularity in the performance of the duties of the public officers
who subsequently conducted its foreclosure sale and issued a provisional certificate of sale. Based
on the presumed validity of the mortgage and the subsequent foreclosure sale, the MTCC, the RTC
and the CA also sustained the validity of respondent's purchase of the disputed property from Yap.
The Court finds no cogent reason to depart from these rulings of the MTCC, RTC and CA. Thus, for
purposes of resolving the issue as to who between petitioner and respondent is entitled to possess
the subject property, this presumption stands.

Going to the main issue in the instant petition, it is settled that in unlawful detainer, one unlawfully
withholds possession thereof after the expiration or termination of his right to hold possession under
any contract, express or implied.11 In such case, the possession was originally lawful but became
unlawful by the expiration or termination of the right to possess; hence, the issue of rightful
possession is decisive for, in such action, the defendant is in actual possession and the plaintiff’s
cause of action is the termination of the defendant’s right to continue in possession.12

In the instant petition, petitioner's basic postulate in her first and second assigned errors is that she
remains the owner of the subject property. Based on her contract of lease with respondent, petitioner
insists that respondent is not permitted to deny her title over the said property in accordance with the
provisions of Section 2 (b), Rule 131 of the Rules of Court.
The Court does not agree.

The conclusive presumption found in Section 2 (b), Rule 131 of the Rules of Court, known as
estoppel against tenants, provides as follows:

Sec. 2. Conclusive presumptions. – The following are instances of conclusive presumptions:

xxxx

(b) The tenant is not permitted to deny the title of his landlord at the time of the commencement of
the relation of landlord and tenant between them. (Emphasis supplied).

It is clear from the abovequoted provision that what a tenant is estopped from denying is the title of
his landlord at the time of the commencement of the landlord-tenant relation.13 If the title asserted is
one that is alleged to have been acquired subsequent to the commencement of that relation, the
presumption will not apply.14 Hence, the tenant may show that the landlord's title has expired or been
conveyed to another or himself; and he is not estopped to deny a claim for rent, if he has been
ousted or evicted by title paramount.15 In the present case, what respondent is claiming is her
supposed title to the subject property which she acquired subsequent to the commencement of the
landlord-tenant relation between her and petitioner. Hence, the presumption under Section 2 (b),
Rule 131 of the Rules of Court does not apply.

The foregoing notwithstanding, even if respondent is not estopped from denying petitioner's claim for
rent, her basis for such denial, which is her subsequent acquisition of ownership of the disputed
property, is nonetheless, an insufficient excuse from refusing to pay the rentals due to petitioner.

There is no dispute that at the time that respondent purchased Yap's rights over the subject
property, petitioner's right of redemption as a mortgagor has not yet expired. It is settled that during
the period of redemption, it cannot be said that the mortgagor is no longer the owner of the
foreclosed property, since the rule up to now is that the right of a purchaser at a foreclosure sale is
merely inchoate until after the period of redemption has expired without the right being
exercised.16 The title to land sold under mortgage foreclosure remains in the mortgagor or his
grantee until the expiration of the redemption period and conveyance by the master's deed.17 Indeed,
the rule has always been that it is only upon the expiration of the redemption period, without the
judgment debtor having made use of his right of redemption, that the ownership of the land sold
becomes consolidated in the purchaser.18

Stated differently, under Act. No. 3135, the purchaser in a foreclosure sale has, during the
redemption period, only an inchoate right and not the absolute right to the property with all the
accompanying incidents.19 He only becomes an absolute owner of the property if it is not redeemed
during the redemption period.20

Pending expiration of the period of redemption, Section 7 of Act No. 3135,21 as amended, provides:

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of
First Instance of the province or place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in an amount equivalent to the use
of the property for a period of twelve months, to indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or without complying with the requirements of this Act.
Such petition shall be made under oath and filed in [the] form of an ex parte motion in the
registration or cadastral proceedings if the property is registered, or in special proceedings in the
case of property registered under the Mortgage Law or under section one hundred and ninety-four of
the Administrative Code, or of any other real property encumbered with a mortgage duly registered
in the office of any register of deeds in accordance with any existing law, and in each case the clerk
of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of
section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by
Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of the province in which the property is
situated, who shall execute said order immediately.

Thus, it is clear from the abovequoted provision of law that, as a consequence of the inchoate
character of the purchaser's right during the redemption period, Act. No. 3135, as amended, allows
the purchaser at the foreclosure sale to take possession of the property only upon the filing of a
bond, in an amount equivalent to the use of the property for a period of twelve (12) months, to
indemnify the mortgagor in case it be shown that the sale was made in violation of the mortgage or
without complying with the requirements of the law. In Cua Lai Chu v. Laqui,22 this Court reiterated
the rule earlier pronounced in Navarra v. Court of Appeals23 that the purchaser at an extrajudicial
foreclosure sale has a right to the possession of the property even during the one-year redemption
period provided the purchaser files an indemnity bond. That bond, nonetheless, is not required after
the purchaser has consolidated his title to the property following the mortgagor's failure to exercise
his right of redemption for in such a case, the former has become the absolute owner thereof.24

It, thus, clearly follows from the foregoing that, during the period of redemption, the mortgagor, being
still the owner of the foreclosed property, remains entitled to the physical possession thereof subject
to the purchaser's right to petition the court to give him possession and to file a bond pursuant to the
provisions of Section 7 of Act No. 3135, as amended. The mere purchase and certificate of sale
alone do not confer any right to the possession or beneficial use of the premises.25

In the instant case, there is neither evidence nor allegation that respondent, as purchaser of the
disputed property, filed a petition and bond in accordance with the provisions of Section 7 of Act No.
3135. In addition, respondent defaulted in the payment of her rents. Thus, absent respondent's filing
of such petition and bond prior to the expiration of the period of redemption, coupled with her failure
to pay her rent, she did not have the right to possess the subject property.

On the other hand, petitioner, as mortgagor and owner, was entitled not only to the possession of
the disputed house and lot but also to the rents, earnings and income derived therefrom. In this
regard, the RTC correctly cited Section 32, Rule 39 of the Rules of Court which provides as follows:

Sec. 32. Rents, earnings and income of property pending redemption. – The purchaser or a
redemptioner shall not be entitled to receive the rents, earnings and income of the property sold on
execution, or the value of the use and occupation thereof when such property is in the possession of
a tenant. All rents, earnings and income derived from the property pending redemption shall belong
to the judgment obligor until the expiration of his period of redemption. (Emphasis supplied)

While the above rule refers to execution sales, the Court finds no cogent reason not to apply the
same principle to a foreclosure sale, as in this case.

The situation became different, however, after the expiration of the redemption period on February
23, 2001. Since there is no allegation, much less evidence, that petitioner redeemed the subject
property within one year from the date of registration of the certificate of sale, respondent became
the owner thereof. Consolidation of title becomes a right upon the expiration of the redemption
period.26 Having become the owner of the disputed property, respondent is then entitled to its
possession.
As a consequence, petitioner's ejectment suit filed against respondent was rendered moot when the
period of redemption expired on February 23, 2001 without petitioner having redeemed the subject
property, for upon expiration of such period petitioner lost his possessory right over the same.
Hence, the only remaining right that petitioner can enforce is his right to the rentals during the time
that he was still entitled to physical possession of the subject property – that is from May 2000 until
February 23, 2001. 1âwphi1

In this regard, this Court agrees with the findings of the MTCC that, based on the evidence and the
pleadings filed by petitioner, respondent is liable for payment of rentals beginning May 2000 until
February 2001, or for a period of ten (10) months. However, it is not disputed that respondent
already gave to petitioner the sum of ₱27,000.00, which is equivalent to two (2) months’ rental, as
deposit to cover for any unpaid rentals. It is only proper to deduct this amount from the rentals due to
petitioner, thus leaving ₱108,000.00 unpaid rentals.

As to attorney’s fees and litigation expenses, the Court agrees with the RTC that since petitioner is,
in entitled to unpaid rentals, her complaint which, among others, prays for the payment of unpaid
rentals, is justified. Thus, the award of attorney'’ and litigation expenses to respondent should be
deleted.

WHEREFORE, the Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 77617,
dated September 8, 2004 and August 16, 2006, respectively, are AFFIRMED with the following
MODIFICATIONS: (1) respondent is ORDERED to pay petitioner ₱108,000.00 as and for unpaid
rentals; (2) the award of attorney’s fees and litigation expenses to respondent is DELETED.

SO ORDERED.
G.R. No. 175844               July 29, 2013

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SARABIA MANOR HOTEL CORPORATION, Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 assailing the Decision2 dated April 24, 2006 and
Resolution3 dated December 6, 2006 of the Court of Appeals, Cebu City (CA) in CA-G.R. CV. No.
81596 which affirmed with modification the rehabilitation plan of respondent Sarabia Manor Hotel
Corporation (Sarabia) as approved by the Regional Trial Court of Iloilo City, Branch 39 (RTC)
through its Order4 dated August 7, 2003.

The Facts

Sarabia is a corporation duly organized and existing under Philippine laws, with principal place of
business at 101 General Luna Street, Iloilo City.5 It was incorporated on February 22, 1982, with an
authorized capital stock of ₱10,000,000.00, fully subscribed and paid-up, for the primary purpose of
owning, leasing, managing and/or operating hotels, restaurants, barber shops, beauty parlors, sauna
and steam baths, massage parlors and such other businesses incident to or necessary in the
management or operation of hotels.6

In 1997, Sarabia obtained a ₱150,000,000.00 special loan package from Far East Bank and Trust
Company (FEBTC) in order to finance the construction of a five-storey hotel building (New Building)
for the purpose of expanding its hotel business. An additional ₱20,000,000.00 stand-by credit line
was approved by FEBTC in the same year.7

The foregoing debts were secured by real estate mortgages over several parcels of land8 owned by
Sarabia and a comprehensive surety agreement dated September 1, 1997 signed by its
stockholders.9 By virtue of a merger, Bank of the Philippine Islands (BPI) assumed all of FEBTC’s
rights against Sarabia.10

Sarabia started to pay interests on its loans as soon as the funds were released in October 1997.
However, largely because of the delayed completion of the New Building, Sarabia incurred various
cash flow problems. Thus, despite the fact that it had more assets than liabilities at that time,11 it,
nevertheless, filed, on July 26, 2002, a Petition12 for corporate rehabilitation (rehabilitation petition)
with prayer for the issuance of a stay order before the RTC as it foresaw the impossibility to meet its
maturing obligations to its creditors when they fall due.

In the said petition, Sarabia claimed that its cash position suffered when it was forced to take-over
the construction of the New Building due to the recurring default of its contractor, Santa Ana – AJ
Construction Corporation (contractor),13 and its subsequent abandonment of the said
project.14 Accordingly, the New Building was completed only in the latter part of 2000, or two years
past the original target date of August 1998, thereby skewing Sarabia’s projected revenues. In
addition, it was compelled to divert some of its funds in order to cover cost overruns. The situation
became even more difficult when the grace period for the payment of the principal loan amounts
ended in 2000 which resulted in higher amortizations. Moreover, external events adversely affecting
the hotel industry, i.e., the September 11, 2001 terrorist attacks and the Abu Sayyaf issue, also
contributed to Sarabia’s financial difficulties.15 Owing to these circumstances, Sarabia failed to
generate enough cash flow to service its maturing obligations to its creditors, namely: (a) BPI (in the
amount of ₱191,476,421.42); (b) Rural Bank of Pavia (in the amount of ₱2,500,000.00); (c) Vic
Imperial Appliance Corp. (Imperial Appliance) (in the amount of ₱5,000,000.00); (d) its various
suppliers (in the amount of ₱7,690,668.04); (e) the government (for minimum corporate income tax
in the amount of ₱547,161.18); and (f) its stockholders (in the amount of ₱18,748,306.35).16

In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding loans,
submitting that the interest payments on the same be pegged at a uniform escalating rate of: (a) 7%
per annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c) 10% p.a. for
the years 2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14% p.a. for the year 2018.
Likewise, Sarabia sought to make annual payments on the principal loans starting in 2004, also in
escalating amounts depending on cash flow. Further, it proposed that it should pay off its
outstanding obligations to the government and its suppliers on their respective due dates, for the
sake of its day to day operations.

Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued a Stay
Order18 on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabia’s rehabilitation
receiver (Receiver). Thereafter, BPI filed its Opposition.19

After several hearings, the RTC gave due course to the rehabilitation petition and referred Sarabia’s
proposed rehabilitation plan to the Receiver for evaluation.20

In a Recommendation21 dated July 10, 2003 (Receiver’s Report), the Receiver found that Sarabia
may be rehabilitated and thus, made the following recommendations:

(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial Appliance, Rural
Bank of Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo), under the following terms and
conditions: (a) the total outstanding balance as of December 31, 2002 shall be recomputed,
with the interest for the years 2001 and 2002 capitalized and treated as part of the principal;
(b) waive all penalties; (c) extend the payment period to seventeen (17) years, i.e., from
2003 to 2019, with a two-year grace period in principal payment; (d) fix the interest rate at
6.75% p.a. plus 10% value added tax on interest for the entire term of the restructured
loans;22 (e) the interest and principal based on the amortization schedule shall be payable
annually at the last banking day of each year; and (f) any deficiency shall be paid personally
by Sarabia’s stockholders in the event it fails to generate enough cash flow; on the other
hand, any excess funds generated at the end of the year shall be paid to the creditors to
accelerate the debt servicing;23

(2) Pay Sarabia’s outstanding payables with its suppliers and the government so as not to
disrupt hotel operations;24

(3) Convert the Advances from stockholders amounting to ₱18,748,306.00 to stockholder’s

equity and other advances amounting to ₱42,688,734.00 as of the December 31, 2002
 tentative financial statements to Deferred Credits; the said conversion should increase
stockholders’ equity to ₱268,545,731.00 and bring the debt to equity ratio to 0.85:1;25

(4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as Accounts
Receivable – Trade, amounting to ₱285,612.17 as of December 31, 2001, and its remaining
receivables after such date;26

(5) No compensation or cash dividends shall be paid to the stockholders during the
rehabilitation period, except those who are directly employed by the hotel as a full time
officer, employee or consultant covered by a valid contract and for a reasonable fee;27

(6) All capital expenditures which are over and above what is provided in the case flow of the
rehabilitation plan which will materially affect Sarabia’s cash position but which are deemed
necessary in order to maintain the hotel’s competitiveness in the industry shall be subject to
the RTC’s approval prior to its implementation;28

(7) Terminate the management contract with Barcelo, thereby saving an estimated
₱25,830,997.00 in management fees, over and above the salaries and benefits of certain
managerial employees;29

(8) Appoint a new management team which would be required to submit a comprehensive
business plan to support the generation of the target revenue as reported in the rehabilitation
plan;30

(9) Open a debt servicing account and transfer all excess funds thereto, which in no case
should be less than ₱500,000.00 at the end of the month; the funds will be drawn payable to
the creditors only based on the amortization schedule;31 and

(10) Release the surety obligations of Sarabia’s stockholders, considering the adequate
collaterals and securities covered by the rehabilitation plan and the continuing mortgages
over Sarabia’s properties.32

The RTC Ruling

In an Order33 dated August 7, 2003, the RTC approved Sarabia’s rehabilitation plan as

recommended by the Receiver, finding the same to be feasible. In this accord, it observed that the
rehabilitation plan was realistic since, based on Sarabia’s financial history, it was shown that it has
the inherent capacity to generate funds to pay its loan obligations given the proper perspective.34 The
recommended rehabilitation plan was also practical in terms of the interest rate pegged at 6.75%
p.a. since it is based on Sarabia’s ability to pay and the creditors’ perceived cost of money.35 It was
likewise found to be viable since, based on the extrapolations made by the Receiver, Sarabia’s
revenue projections, albeit projected to slow down, remained to have a positive business/profit
outlook altogether.36

The RTC further noted that while it may be true that Sarabia has been unable to comply with its
existing terms with BPI, it has nonetheless complied with its obligations to its employees and
suppliers and pay its taxes to both local and national government without disrupting the day-to-day
operations of its business as an on-going concern.37

More significantly, the RTC did not give credence to BPI’s opposition to the Receiver’s
recommended rehabilitation plan as neither BPI nor the Receiver was able to substantiate the claim
that BPI’s cost of funds was at the 10% p.a. threshold. In this regard, the RTC gave more credence
to the Receiver’s determination of fixing the interest rate at 6.75% p.a., taking into consideration not
only Sarabia’s ability to pay based on its proposed interest rates, i.e., 7% to 14% p.a., but also BPI’s
perceived cost of money based on its own published interest rates for deposits, i.e., 1% to 4.75%
p.a., as well as the rates for treasury bills, i.e., 5.498% p.a. and CB overnight borrowings, i.e.,
7.094%. p.a.38

The CA Ruling

In a Decision39 dated April 24, 2006, the CA affirmed the RTC’s ruling with the modification of
reinstating the surety obligations of Sarabia’s stockholders to BPI as an additional safeguard for the
effective implementation of the approved rehabilitation plan.40 It held that the RTC’s conclusions as
to the feasibility of Sarabia’s rehabilitation was well-supported by the company’s financial
statements, both internal and independent, which were properly analyzed and examined by the
Receiver.41 It also upheld the 6.75%. p.a. interest rate on Sarabia’s loans, finding the said rate to be
reasonable given that BPI’s interests as a creditor were properly accounted for. As published, BPI’s
time deposit rate for an amount of ₱5,000,000.00 (with a term of 360-364 days) is at 5.5% p.a.; while
the benchmark ninety one-day commercial paper, which banks used to price their loan averages to
6.4% p.a. in 2005, has a three-year average rate of 6.57% p.a.42 As such, the 6.75% p.a. interest
rate would be higher than the current market interest rates for time deposits and benchmark
commercial papers. Moreover, the CA pointed out that should the prevailing market interest rates
change as feared by BPI, the latter may still move for the modification of the approved rehabilitation
plan.43

Aggrieved, BPI moved for reconsideration which was, however, denied in a Resolution44 dated
December 6, 2006.

Hence, this petition.

The Issue Before the Court

The primordial issue raised for the Court’s resolution is whether or not the CA correctly affirmed
Sarabia’s rehabilitation plan as approved by the RTC, with the modification on the reinstatement of
the surety obligations of Sarabia’s stockholders.

BPI mainly argues that the approved rehabilitation plan did not give due regard to its interests as a
secured creditor in view of the imposition of a fixed interest rate of 6.75% p.a. and the extended loan
repayment period.45 It likewise avers that Sarabia’s misrepresentations in its rehabilitation petition
remain unresolved.46

On the contrary, Sarabia essentially maintains that: (a) the present petition improperly raises
questions of fact;47 (b) the approved rehabilitation plan takes into consideration all the interests of the
parties and the terms and conditions stated therein are more reasonable than what BPI
proposes;48 and (c) BPI’s allegations of misrepresentation are mere desperation moves to convince
the Court to overturn the rulings of the courts a quo.49

The Court’s Ruling

The petition has no merit.

A. Propriety of BPI’s petition;
procedural considerations.

It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules of Court
covers only questions of law. In this relation, questions of fact are not reviewable and cannot be
passed upon by the Court unless, the following exceptions are found to exist: (a) when the findings
are grounded entirely on speculations, surmises, or conjectures; (b) when the inference made is
manifestly mistaken, absurd, or impossible; (c) when there is a grave abuse of discretion; (d) when
the judgment is based on misappreciation of facts; (e) when the findings of fact are conflicting; (f)
when in making its findings, the same are contrary to the admissions of both parties; (g) when the
findings are contrary to those of the trial court; (h) when the findings are conclusions without citation
of specific evidence on which they are based; (i) when the facts set forth in the petition as well as in
the petitioner’s main and reply briefs are not disputed by the respondent; and (j) when the findings of
fact are premised on the supposed absence of evidence and contradicted by the evidence on
record.50

The distinction between questions of law and questions of fact is well-defined. A question of law
exists when the doubt or difference centers on what the law is on a certain state of facts. A question
of fact, on the other hand, exists if the doubt centers on the truth or falsity of the alleged facts. This
being so, the findings of fact of the CA are final and conclusive and the Court will not review them on
appeal.51

In view of the foregoing, the Court finds BPI’s petition to be improper – and hence, dismissible52 – as
the issues raised therein involve questions of fact which are beyond the ambit of a Rule 45 petition
for review.

To elucidate, the determination of whether or not due regard was given to the interests of BPI as a
secured creditor in the approved rehabilitation plan partakes of a question of fact since it will require
a review of the sufficiency and weight of evidence presented by the parties – among others, the
various financial documents and data showing Sarabia’s capacity to pay and BPI’s perceived cost of
money – and not merely an application of law. Therefore, given the complexion of the issues which
BPI presents, and finding none of the above-mentioned exceptions to exist, the Court is constrained
to dismiss its petition, and prudently uphold the factual findings of the courts a quo which are entitled
to great weight and respect, and even accorded with finality. This especially obtains in corporate
rehabilitation proceedings wherein certain commercial courts have been designated on account of
their expertise and specialized knowledge on the subject matter, as in this case.

In any event, even discounting the above-discussed procedural considerations, the Courts still finds
BPI’s petition lacking in merit.

B. Approval of Sarabia’s
rehabilitation plan; substantive
considerations.

Records show that Sarabia has been in the hotel business for over thirty years, tracing its operations
back to 1972. Its hotel building has been even considered a landmark in Iloilo, being one of its kind
in the province and having helped bring progress to the community.23 Since then, its expansion was
continuous which led to its decision to commence with the construction of a new hotel building.
Unfortunately, its contractor defaulted which impelled Sarabia to take-over the same. This
significantly skewed its projected revenues and led to various cash flow difficulties, resulting in its
incapacity to meet its maturing obligations.
Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been
crafted in order to give companies sufficient leeway to deal with debilitating financial predicaments in
the hope of restoring or reaching a sustainable operating form if only to best

accommodate the various interests of all its stakeholders, may it be the corporation’s stockholders,
its creditors and even the general public. In this light, case law has defined corporate rehabilitation
as an attempt to conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency. It contemplates the continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of successful
operation and liquidity. Verily, the purpose of rehabilitation proceedings is to enable the company to
gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.54 Thus,
rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is
economically more feasible and its creditors can recover, by way of the present value of payments
projected in the plan, more, if the corporation continues as a going concern than if it is immediately
liquidated.55

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation56 (Interim Rules) states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a majority of the corporation’s total
liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is currently
incorporated in the FRIA,57 is necessary to curb the majority creditors’ natural tendency to dictate
their own terms and conditions to the rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery.

It is within the parameters of the aforesaid provision that the Court examines the approval of
Sarabia’s rehabilitation.

i. Feasibility of Sarabia’s rehabilitation.

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough
examination and analysis of the distressed corporation’s financial data must be conducted. If the
results of such examination and analysis show that there is a real opportunity to rehabilitate the
corporation in view of the assumptions made and financial goals stated in the proposed rehabilitation
plan, then it may be said that a rehabilitation is feasible. In this accord, the rehabilitation court should
not hesitate to allow the corporation to operate as an on-going concern, albeit under the terms and
conditions stated in the approved rehabilitation plan. On the other hand, if the results of the financial
examination and analysis clearly indicate that there lies no reasonable probability that the distressed
corporation could be revived and that liquidation would, in fact, better subserve the interests of its
stakeholders, then it may be said that a rehabilitation would not be feasible. In such case, the
rehabilitation court may convert the proceedings into one for liquidation.58 As further guidance on the
matter, the Court’s pronouncement in Wonder Book Corporation v. Philippine Bank of
Communications59 proves instructive:

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can generate
more cash if used in its daily operations than sold. Its liquidity issues can be addressed by a
practicable business plan that will generate enough cash to sustain daily operations, has a definite
source of financing for its proper and full implementation, and anchored on realistic assumptions and
goals. This remedy should be denied to corporations whose insolvency appears to be irreversible
and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is
rendered obvious by the following: (a) the absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or
complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or fully
depreciated.60 (Emphasis and underscoring supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, Sarabia’s financial history shows that it has the inherent capacity to
generate funds to repay its loan obligations if applied through the proper financial framework. The
Receiver’s examination and analysis of Sarabia’s financial data reveals that the latter’s business is
not only an on-going but also a growing concern. Despite its financial constraints, Sarabia likewise
continues to be profitable with its hotelier business as its operations have not been
disrupted.61 Hence, given its current fiscal position, the prospect of substantial and continuous
revenue generation is a realistic goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-on-year
growth from the time that it applied for rehabilitation until the end of its rehabilitation plan in 2018,
albeit with decreasing growth rates (growth rate is at 26% in 2003, 5% in 2004-2007, 3% in 2008-
2018).62 Should such projections come through, Sarabia would have the ability not just to pay off its
existing debts but also to carry on with its intended expansion. The projected sustainability of its
business, as mapped out in the approved rehabilitation plan, makes Sarabia’s rehabilitation a more
viable option to satisfy the interests of its stakeholders in the long run as compared to its immediate
liquidation.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved rehabilitation
plan, namely: (a) any deficiency in the required minimum payments to creditors based on the
presented amortization schedule shall be paid personally by Sarabia’s stockholders;

(b) the conversion of the advances from stockholders amounting to ₱18,748,306.00 and deferred
credits amounting to ₱42,688,734 as of the December 31, 2002 tentative audited financial
statements to stockholder’s equity was granted;64 (c) all capital expenditures which are over and
above what is provided in the cash flow of the approved rehabilitation plan which will materially affect
the cash position of the hotel but which are deemed necessary in order to maintain the hotel’s
competitiveness in the industry shall be subject to the approval by the Court prior to
implementation;65 (d) the formation of Sarabia’s new management team and the requirement that the
latter shall be required to submit a comprehensive business plan to support the generation of
revenues as reported in the Rehabilitation Plan, both short term and long term;66 (e) the maintenance
of all Sarabia’s existing real estate mortgages over hotel properties as collaterals and securities in
favor of BPI until the former’s full and final liquidation of its outstanding loan obligations with the
latter;67 and (f) the reinstatement of the comprehensive surety agreement of Sarabia’s stockholders
regarding the former’s debt to BPI.68 With these terms and conditions69 in place, the subsisting
obligations of Sarabia to its creditors would, more likely than not, be satisfied.

Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation to be feasible.
ii. Manifest unreasonableness of BPI’s opposition.

Although undefined in the Interim Rules, it may be said that the opposition of a distressed
corporation’s majority creditor is manifestly unreasonable if it counter-proposes unrealistic payment
terms and conditions which would, more likely than not, impede rather than aid its rehabilitation. The
unreasonableness becomes further manifest if the rehabilitation plan, in fact, provides for adequate
safeguards to fulfill the majority creditor’s claims, and yet the latter persists on speculative or
unfounded assumptions that his credit would remain unfulfilled.

While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall consider
certain incidents in determining whether the opposition is manifestly unreasonable,70 BPI neither
proposes Sarabia’s liquidation over its rehabilitation nor questions the controlling interest of
Sarabia’s shareholders or owners. It only takes exception to: (a) the imposition of the fixed interest
rate of 6.75% p.a. as recommended by the Receiver and as approved by the courts a quo,
proposing that the original escalating interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen
years be applied instead;71 and (b) the fact that Sarabia’s misrepresentations in the rehabilitation
petition, i.e., that it physically acquired additional property whereas in fact the increase was mainly
due to the recognition of Revaluation Increment and because of capital expenditures, were not taken
into consideration by the courts a quo.72

Anent the first matter, it must be pointed out that oppositions which push for high interests rates are
generally frowned upon in rehabilitation proceedings given that the inherent purpose of a
rehabilitation is to find ways and means to minimize the expenses of the distressed corporation
during the rehabilitation period. It is the objective of a rehabilitation proceeding to provide the best
possible framework for the corporation to gradually regain or achieve a sustainable operating form.
Hence, if a creditor, whose interests remain well-preserved under the existing rehabilitation plan, still
declines to accept interests pegged at reasonable rates during the period of rehabilitation, and, in
turn, proposes rates which are largely counter-productive to the rehabilitation, then it may be said
that the creditor’s opposition is manifestly unreasonable.

In this case, the Court finds BPI’s opposition on the approved interest rate to be manifestly
unreasonable considering that: (a) the 6.75% p.a. interest rate already constitutes a reasonable rate
of interest which is concordant with Sarabia’s projected rehabilitation; and (b) on the contrary, BPI’s
proposed escalating interest rates remain hinged on the theoretical assumption of future fluctuations
in the market, this notwithstanding the fact that its interests as a secured creditor remain well-
preserved.

The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest rate is
actually higher than BPI’s perceived cost of money as evidenced by its published time deposit rate
(for an amount of ₱5,000,000.00, with a term of 360-364 days) which is only set at 5.5% p.a.;
second, the 6.75% p.a. is also higher than the benchmark ninety one-day commercial paper, which
is used by banks to price their loan averages to 6.4% p.a. in 2005, and has a three-year average
rate of 6.57% p.a.; and third, BPI’s interests as a secured creditor are adequately protected by the
maintenance of all Sarabia’s existing real estate mortgages over its hotel properties as collateral as
well as by the reinstatement of the comprehensive surety agreement of Sarabia’s stockholders,
among other terms in the approved rehabilitation plan.

As to the matter of Sarabia’s alleged misrepresentations, records disclose that Sarabia already
clarified its initial statements in its rehabilitation petition by submitting, on its own accord, a
supplemental affidavit dated October 24, 200273 that explains that the increase in its properties and
assets was indeed by recognition of revaluation increment.74 Proceeding from this fact, the CA
observed that BPI actually failed to establish its claimed defects in light of Sarabia’s assertive and
forceful explanation that the alleged inaccuracies do not warrant the dismissal of its petition.75 Thus,
absent any compelling reason to disturb the CA's finding on this score, the Court deems it proper to
dismiss BPI's allegations of misrepresentation against Sarabia.

As a final point, BPI claims that Sarabia's projections were "too optimistic," its management was
"extremely incompetent"76 and that it was even forced to pay a pre-termination penalty due to its
previous loan with the Landbank of the Philippines.77 Suffice it to state that bare allegations of fact
should not be entet1ained as they are bereft of any probative value.78 In any event, even if it is
assumed that the said allegations are substantiated by clear and convincing evidence, the Court,
absent any cogent basis to proceed otherwise, remains steadfast in its preclusion to thresh out
matters of fact on a Rule 45 petition, as in this case.

All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby sustained. In
view of the foregoing pronouncements, the Court finds it unnecessary to delve on the other ancillary
issues as herein raised.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006 and
Resolution dated December 6, 2006 of the Court of Appeals, Cebu City in CA-G.R. CV. No. 81596
are hereby AFFIRMED.

SO ORDERED.
G.R. No. 180036               January 16, 2013

SITUS DEV. CORPORATION, DAILY SUPERMARKET, INC. and COLOR LITHOGRAPH PRESS,
INC., Petitioners,
vs.
ASIATRUST BANK, ALLIED BANKING CORPORATION, METROPOLITAN BANK AND TRUST
COMPANY and CAMERON GRANVILLE II ASSET MANAGEMENT, INC.
("CAMERON"), Respondents.

RESOLUTION

SERENO, CJ.:

For resolution is the Motion for Reconsideration1 of our 25 July 2012 Decision2 in the case involving
petitioners herein, Situs Development Corporation, Daily Supermarket, Inc. and Color Lithographic
Press, Inc.

Most of the arguments raised by petitioners are too insubstantial to merit our consideration or are
merely rehashed from their previous pleadings and have already been passed upon by this Court.
However, certain issues merit a brief discussion, to wit:

1. That the properties belonging to petitioner corporations’ majority stockholders may be

included in the rehabilitation plan pursuant to Metropolitan Bank and Trust Company v. ASB
Holdings, Inc.3 (the Metrobank Case);

2. That the subject properties should be included in the ambit of the Stay Order by virtue of
the provisions of the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), which
should be given a retroactive effect; and

3. That Allied Bank and Metro Bank were not the owners of the mortgaged properties when
the Stay Order was issued by the rehabilitation court.

On the first issue, petitioners incorrectly argue that the properties belonging to their majority
stockholders may be included in the rehabilitation plan, because these properties were mortgaged to
secure petitioners’ loans. In support of their argument, they cite a footnote appearing in the
Metrobank Case, which states:4

In their petition for rehabilitation, the corporations comprising the ASB Group of Companies alleged
that their allied companies … have joined in the said petition ‘because they executed mortgages
and/or pledges over their real and personal properties to secure the obligations of petitioner ASB
Group of Companies. Further, (they) agreed to contribute, to the extent allowed by law, some of their
specified properties and assets to help rehabilitate petitioner ASB Group of Companies.’ (Rollo, pp.
119-120)

A reading of the footnote shows that it is not a ruling on the propriety of the joinder of parties; rather,
it is a statement of the fact that the afore-quoted allegation was made in the petition for rehabilitation
in that case.

On the second issue, petitioners argue that the trial court was correct in including the subject
properties in the ambit of the Stay Order. Under the FRIA, the Stay Order may now cover third-party
or accommodation mortgages, in which the "mortgage is necessary for the rehabilitation of the
debtor as determined by the court upon recommendation by the rehabilitation receiver."5 The FRIA
likewise provides that its provisions may be applicable to further proceedings in pending cases,
except to the extent that, in the opinion of the court, their application would not be feasible or would
work injustice.6

Sec. 146 of the FRIA, which makes it applicable to "all further proceedings in insolvency, suspension
of payments and rehabilitation cases x x x except to the extent that in the opinion of the court their
application would not be feasible or would work injustice," still presupposes a prospective
application. The wording of the law clearly shows that it is applicable to all further proceedings. In no
way could it be made retrospectively applicable to the Stay Order issued by the rehabilitation court
back in 2002.

At the time of the issuance of the Stay Order, the rules in force were the 2000 Interim Rules of
Procedure on Corporate Rehabilitation (the "Interim Rules"). Under those rules, one of the effects of
a Stay Order is the stay of the "enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor."7 Nowhere in the Interim Rules is the rehabilitation court
authorized to suspend foreclosure proceedings against properties of third-party mortgagors. In fact,
we have expressly ruled in Pacific Wide Realty and Development Corp. v. Puerto Azul Land,
Inc.8 that the issuance of a Stay Order cannot suspend the foreclosure of accommodation
mortgages. Whether or not the properties subject of the third-party mortgage are used by the debtor
corporation or are necessary for its operation is of no moment, as the Interim Rules do not make a
distinction. To repeat, when the Stay Order was issued, the rehabilitation court was only empowered
to suspend claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor.
Thus, it was beyond the jurisdiction of the rehabilitation court to suspend foreclosure proceedings
against properties of third-party mortgagors.

The third issue, therefore, is immaterial.  Whether or not respondent banks had acquired ownership
1âwphi1

of the subject properties at the time of the issuance of the Stay Order, the same conclusion will still
be reached. The subject properties will still fall outside the ambit of the Stay Order issued by the
rehabilitation court.

Since the subject properties are beyond the reach of the Stay Order, and since foreclosure and
consolidation of title may no longer be stalled, petitioners’ rehabilitation plan is no longer feasible.
We therefore affirm our earlier finding that the dismissal of the Petition for the Declaration of State of
Suspension of Payments with Approval of Proposed Rehabilitation Plan is in order.

WHEREFORE, the Court resolves to DENY WITH FINALITY the instant Motion for Reconsideration
for lack of merit. No further pleadings shall be entertained. Let entry of judgment be made in due
course.

SO ORDERED.
G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First
Instance of Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the
pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern.
Inc., (later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the
former leased to the latter a portion of his property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm.
and are to be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on
1,693 sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or
less, payable yearly in advance within the 1st twenty days of each year; provided, a financial
aid in the sum of P15,000 to clear the leased premises of existing improvements thereon is
paid in this manner; P10,000 upon execution of this lease and P5,000 upon delivery of
leased premises free and clear of improvements thereon within 30 days from the date of
execution of this agreement. The portion on the side of the leased premises with an area of
365 sqrm. more or less, will be occupied by LESSEE without rental during the lifetime of this
lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on
P2,930.70 per month discounted at 12% interest per annum or a total net amount of
P130,288.47 before registration of lease. Leased premises shall be delivered within 30 days
after 1st partial payment of financial aid. 
2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-
appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73,
the amount it computed as constituting the interest or discount for the first eight years, in the total
sum P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a
mistake in computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the
deducted amount to only P98,828.03.  3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03,
with interest, claiming this had been illegally deducted from him in violation of the Usury Law.   He4

also prayed for moral damages and attorney's fees. In its answer, the defendant-appellee admitted
the factual allegations of the complaint but argued that the amount deducted was not usurious
interest but a given to it for paying the rentals in advance for eight years.   Judgment on the
5

pleadings was rendered for the defendant.  6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the
computation of the interest collected out of the rentals paid for the first eight years; that such interest
was excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the
defendant-appellant's computation of the total amount to be deducted for the eight years advance
rentals.  7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:

6. The interest collected by defendant out of the rentals for the first eight years was
excessive and beyond that allowable by law, because the total interest on the said amount is
only P33,755.90 at P4,219.4880 per yearly rental; and considering that the interest should
be computed excluding the first year rental because at the time the amount of P281, 199.20
was paid it was already due under the lease contract hence no interest should be collected
from the rental for the first year, the amount of P29,536.42 only as the total interest should
have been deducted by defendant from the sum of P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is
not excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that
the parties intended a loan rather than a lease. The provision for the payment of rentals in advance
cannot be construed as a repayment of a loan because there was no grant or forbearance of money
as to constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee
was discharging its obligation in advance by paying the eight years rentals, and it was for this
advance payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the
parties may establish such stipulations, clauses, terms and condition as they may want to include;
and as long as such agreements are not contrary to law, morals, good customs, public policy or
public order, they shall have the force of law between them.  8

There is no usury in this case because no money was given by the defendant-appellee to the
plaintiff-appellant, nor did it allow him to use its money already in his possession.   There was neither
9

loan nor forbearance but a mere discount which the plaintiff-appellant allowed the defendant-
appellee to deduct from the total payments because they were being made in advance for eight
years. The discount was in effect a reduction of the rentals which the lessor had the right to
determine, and any reduction thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on
usury. 10
To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be
exacted for the use of the money in excess of and in addition to interest allowed by law."  11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a
corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things
concur in every transaction, it is safe to affirm that no case of usury can be declared. 
12

Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant)
shag pay the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per
month discounted at 12% interest per annum. Thus, the total rental for one-year period is
P35,162.40 (P2,930.20 multiplied by 12 months) and that the interest therefrom is
P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest for the first
eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not
P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most

seriously misleading. He just computed the annual discount to be at P4,129.4880 and then
simply multiplied it by eight (8) years. He did not take into consideration the naked fact that
the rentals due on the eight year were paid in advance by seven (7) years, the rentals due
on the seventh year were paid in advance by six (6) years, those due on the sixth year by
five (5) years, those due on the fifth year by four (4) years, those due on the fourth year by
three (3) years, those due on the third year by two (2) years, and those due on the second
year by one (1) year, so much so that the total number of years by which the annual rental of
P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of
P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was
most fair to plaintiff. It did not simply multiply the annual rental discount by 28 years. It
computed the total discount with the principal diminishing month to month as shown by
Annex 'A' of its memorandum. This is why the total discount amount to only P 8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is
erroneous. Also after making its own computations and after examining closely defendant's
Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on
the rentals due for the first year so much so that the computation conforms with the provision
of the Lease Agreement to the effect that the rentals shall be 'payable yearly in advance
within the 1st 20 days of each year. '

We do not agree. The above computation appears to be too much technical mumbo-jumbo and
could not have been the intention of the parties to the transaction. Had it been so, then it should
have been clearly stipulated in the contract. Contracts should be interpreted according to their literal
meaning and should not be interpreted beyond their obvious intendment.  13

The plaintfff-appellant simply understood that for every year of advance payment there would be a
deduction of 12% and this amount would be the same for each of the eight years. There is no
showing that the intricate computation applied by the trial court was explained to him by the
defendant-appellee or that he knowingly accepted it.
The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had
actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It
is not normal for a person to agree to a reduction corresponding to twenty eight years advance
rentals when all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at the
time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it,
but that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent
modification that the interest should be limited to only seven years because the first year rental was
not being paid in advance. The agreement was for a uniform deduction for the advance rentals for
each of the eight years, and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years,
the total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving
a difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will
leave a balance of P65,114.35 still due the plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a
whole rather on the single stipulation invoked by the respondent for the flat reduction of
P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee
Petrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One
Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until
fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-
appellee.

SO ORDERED.
G.R. No. 26085             August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.

JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees
to pay a certain amount per month as rent, may such rent render such a contract usurious
when the amount paid as rent, computed upon the purchase price, amounts to a higher rate
of interest upon said amount than that allowed by law?

(c)             May the contract in the present case may be modified by parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice
Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality of
Tarlac of the Province of Tarlac for the price of P25,000, promising to pay therefor in three
installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the
second installment of P8,000 was due on or before 31st day of May, 1921; the balance of P15,000
at 12 per cent interest was due and payable on or about the 30th day of November, 1922. One of the
conditions of that contract of purchase was that on failure of the purchaser (plaintiffs and appellants)
to pay the balance of said purchase price or any of the installments on the date agreed upon, the
property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the
record shows upon the due dates. The balance of P15,000 due on said contract of purchase was
paid on or about the 1st day of December, 1922, in the manner which will be explained below. On
the date when the balance of P15,000 with interest was paid, the vendor of said property had issued
to the purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title
(No. 528) was transfer certificate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, 1913.

PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote
a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of
said indebtedness was not paid, an action would be brought for the purpose of recovering the
property, together with damages for non compliance with the condition of the contract of purchase.
The pertinent parts of said letter read as follows:

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos
judicialmente contra Vd. para reclamar la devolucion del camarin y los daños y perjuicios
ocasionados a la compañia por su incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due
and payable upon said contract of purchase on the 30th day of November, 1922, the sum
P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began
to make an effort to borrow money with which to pay the balance due, began to make an effort to
borrow money with which to pay the balance of their indebtedness on the purchase price of the
property involved. Finally an application was made to the defendant for a loan for the purpose of
satisfying their indebtedness to the vendor of said property. After some negotiations the defendants
agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs
execute and deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum
of P16,965.09. The defendant, in addition to said amount paid by check, delivered to the plaintiffs
the sum of P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for
drafting said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and for
the plaintiffs of P17,500 upon the execution and delivery of said contract. Said contracts was dated
the 28th day of November, 1922, and is in the words and figures following:

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de

edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y
transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam,
mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de
Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la

cantidad de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto
hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos,
vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y
causahabientes, una finca que, segun el Certificado de Transferencia de Titulo No. 40
expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills
Company Limited" que al incorporarse se donomino y se denomina "Luzon Rice Mills Inc.," y
que esta corporacion nos ha transferido en venta absoluta, se describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de

Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la
Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el
plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de
la Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2;
desde este punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.;
69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida;
midiendo una extension superficcial de cuatro mil doscientos diez y seis metros cuadrados
(4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el plano y sobre
el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70
centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la
verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1.º de
febrero de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años
contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero si
transcurre dicho plazo de cinco años sin ejercitar el derecho de retracto que nos hemos
reservado, entonces quedara esta venta absoluta e irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca
arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos
(P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si el
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara
lugar a la terminacion de este arrendamieno y a la perdida del derecho de retracto
que nos hemos reservado, como si naturalmente hubiera expirado el termino para
ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca
y desahuciarnos de la misma.
 Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los
precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y Potenciana
Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por

cuadruplicado en Manila, hoy a 28 de noviembre de 1922.

(Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

(Fdos.) MOISES M. BUHAIN

B. S. BANAAG

An examination of said contract of sale with reference to the first question above, shows clearly that
it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that
said contract, standing alone, is a mortgage. The pertinent language of the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años
contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito
Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero
si transcurre dicho plazo de cinco (5) años sin ejercitar al derecho de retracto que nos
hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that
there can certainly be not doubt as to the purpose of the plaintiff to sell the property in question,
reserving the right only to repurchase the same. The intention to sell with the right to repurchase
cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which she
became the "tenant" of the purchaser. That contract of rent appears in said quoted document above
as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca
arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez
Sy Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al referido
Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de
retro is an absolute sale of the property with the right to repurchase and not a mortgage; and,
second, that by virtue of the said contract the vendor became the tenant of the purchaser, under the
conditions mentioned in paragraph 3 of said contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to
declare the same to be a mortgage and not a sale whenever the interpretation of such a contract
justifies that conclusion. There must be something, however, in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they intended the contract to be a
"mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252;
Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil.,
379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs. Santiago, 38
Phil., 157.)

We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will
not construe an instrument to one of sale with pacto de retro, with the stringent and onerous effect
which follows, unless the terms of the document and the surrounding circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a
contract, but when an issue is squarely presented that a contract does not express the intention of
the parties, courts will, when a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de
retro. They admit that they signed it. They admit they sold the property in question with the right to
repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a "sale"
with pacto de retro, and the plaintiffs have shown no circumstance whatever which would justify us in
construing said contract to be a mere "loan" with guaranty. In every case in which this court has
construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done so,
either because the terms of such contract were incompatible or inconsistent with the theory that said
contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra;
Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the
conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while
the vendor used to the terms "sale and transfer with the right to repurchase," yet in said contract he
described himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage". In the
case of Rodriguez vs. Pamintuan and De Jesus the person who executed the instrument, purporting
on its face to be a deed of sale of certain parcels of land, had merely acted under a power of
attorney from the owner of said land, "authorizing him to borrow money in such amount and upon
such terms and conditions as he might deem proper, and to secure payment of the loan by a
mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a
deed of sale was executed, the supposed vendor remained in possession of the land and invested
the money he had obtained from the supposed vendee in making improvements thereon, which fact
justified the court in holding that the transaction was a mere loan and not a sale. In the case
of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor,
and such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of
the title of ownership of the purchaser at the expiration of the term stipulated in the original contract
for the exercise of the right of repurchase."

Referring again to the right of the parties to vary the terms of written contract, we quote from the
dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the Supreme
Court of the United States and the contention of the Chief Justice in his dissenting opinion was
affirmed and the decision of the Supreme Court of the Philippine Islands was reversed. (See
decision of the Supreme Court of the United States, June 3, 1918.)1 The Chief Justice said in
discussing that question:

According to article 1282 of the Civil Code, in order to judge of the intention of the contracting
parties, consideration must chiefly be paid to those acts executed by said parties which are
contemporary with and subsequent to the contract. And according to article 1283, however general
the terms of a contract may be, they must not be held to include things and cases different from
those with regard to which the interested parties agreed to contract. "The Supreme Court of the
Philippine Islands held the parol evidence was admissible in that case to vary the terms of the
contract between the Government of the Philippine Islands and the Philippine Sugar Estates
Development Co. In the course of the opinion of the Supreme Court of the United States Mr. Justice
Brandeis, speaking for the court, said:

It is well settled that courts of equity will reform a written contract where, owing to mutual
mistake, the language used therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction of a contract presents a
question of law and that, therefore, the mistake was one of law is not a bar to granting
relief. . . . This court is always disposed to accept the construction which the highest court of
a territory or possession has placed upon a local statute. But that disposition may not be
yielded to where the lower court has clearly erred. Here the construction adopted was rested
upon a clearly erroneous assumption as to an established rule of equity. . . . The burden of
proof resting upon the appellant cannot be satisfied by mere preponderance of the evidence.
It is settled that relief by way of reformation will not be granted unless the proof of mutual
mistake be of the clearest and most satisfactory character.

The evidence introduced by the appellant in the present case does not meet with that stringent
requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which
justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale with
the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are clear
and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations
shall be followed." Article 1282 provides: "in order to judge as to the intention of the contracting
parties, attention must be paid principally to their conduct at the time of making the contract and
subsequently thereto."

We cannot thereto conclude this branch of our discussion of the question involved, without quoting
from that very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of
his time. He said, in discussing the question whether or not the contract, in the case of Lichauco vs.
Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares
and states that he is the proprietor in fee simple of two parcels of fallow unappropriated
crown land situated within the district of his pueblo. The first has an area of 73 quiñones,
8 balitas and 8 loanes, located in the sitio of Batasan, and its boundaries are, etc., etc. The
second is in the sitio of Panantaglay, barrio of Calumpang has as area of 73 hectares, 22
ares, and 6 centares, and is bounded on the north, etc., etc."

In the executory part of the said instrument, it is stated:

 'That under condition of right to repurchase (pacto de retro) he sells the said
properties to the aforementioned Doña Cornelia Laochangco for P4,000 and upon
the following conditions: First, the sale stipulated shall be for the period of two years,
counting from this date, within which time the deponent shall be entitled to
repurchase the land sold upon payment of its price; second, the lands sold shall,
during the term of the present contract, be held in lease by the undersigned who
shall pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in
sugar at the option of the vendor; third, all the fruits of the said lands shall be
deposited in the sugar depository of the vendee, situated in the district of Quiapo of
this city, and the value of which shall be applied on account of the price of this sale;
fourth, the deponent acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender currency of this
country . . .; fifth, all the taxes which may be assessed against the lands surveyed by
competent authority, shall be payable by and constitute a charge against the vendor;
sixth, if, through any unusual event, such as flood, tempest, etc., the properties
hereinbefore enumerated should be destroyed, wholly or in part, it shall be
incumbent upon the vendor to repair the damage thereto at his own expense and to
put them into a good state of cultivation, and should he fail to do so he binds himself
to give to the vendee other lands of the same area, quality and value.'

xxx     xxx     xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's
contract with Laochangco was not one of sale with right of repurchase, but merely one of
loan secured by those properties, and, consequently, that the ownership of the lands in
questions could not have been conveyed to Laochangco, inasmuch as it continued to be
held by Berenguer, as well as their possession, which he had not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the instrument, Exhibit C. Not
because the lands may have continued in possession of the vendor, not because the latter
may have assumed the payment of the taxes on such properties, nor yet because the same
party may have bound himself to substitute by another any one of the properties which might
be destroyed, does the contract cease to be what it is, as set forth in detail in the public
instrument. The vendor continued in the possession of the lands, not as the owner thereof as
before their sale, but as the lessee which he became after its consummation, by virtue of a
contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of ownership
is not implied by the circumstance of the lessee's assuming the responsibility of the payment
is of the taxes on the property leased, for their payment is not peculiarly incumbent upon the
owner, nor is such right implied by the obligation to substitute the thing sold for another while
in his possession under lease, since that obligation came from him and he continues under
another character in its possession—a reason why he guarantees its integrity and obligates
himself to return the thing even in a case of force majeure. Such liability, as a general rule, is
foreign to contracts of lease and, if required, is exorbitant, but possible and lawful, if
voluntarily agreed to and such agreement does not on this account involve any sign of
ownership, nor other meaning than the will to impose upon oneself scrupulous diligence in
the care of a thing belonging to another.

The purchase and sale, once consummated, is a contract which by its nature transfers the
ownership and other rights in the thing sold. A pacto de retro, or sale with right to
 repurchase, is nothing but a personal right stipulated between the vendee and the vendor, to
the end that the latter may again acquire the ownership of the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method of
loan; it is likewise true that in practice many cases occur where the consummation of a pacto
de retro sale means the financial ruin of a person; it is also, unquestionable that in pacto de
retro sales very important interests often intervene, in the form of the price of the lease of the
thing sold, which is stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale with
right of repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to
secure a loan.

We come now to a discussion of the second question presented above, and that is, stating the same
in another form: May a tenant charge his landlord with a violation of the Usury Law upon the ground
that the amount of rent he pays, based upon the real value of the property, amounts to a usurious
rate of interest? When the vendor of property under a pacto de retro rents the property and agrees to
pay a rental value for the property during the period of his right to repurchase, he thereby becomes a
"tenant" and in all respects stands in the same relation with the purchaser as a tenant under any
other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right to
repurchase, or the sum of P375 per month, based upon the value of the property, amounted to
usury. Usury, generally speaking, may be defined as contracting for or receiving something in
excess of the amount allowed by law for the loan or forbearance of money—the taking of more
interest for the use of money than the law allows. It seems that the taking of interest for the loan of
money, at least the taking of excessive interest has been regarded with abhorrence from the earliest
times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England,
and especially the English Church, entertained the opinion, then, current in Europe, that the taking of
any interest for the loan of money was a detestable vice, hateful to man and contrary to the laws of
God. (3 Coke's Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we
shall find that there is scarcely any people, ancient or modern, that have not had usury laws. . . . The
Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It will be
deemed a little singular, that the same voice against usury should have been raised in the laws of
China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the
laws of all nations that we know of, whether Greek or Barbarian."

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine
Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter
into a contract with the tenant for the payment of a specific amount of rent for the use and
occupation of said property, even though the amount paid as "rent," based upon the value of the
property, might exceed the rate of interest allowed by law? That question has never been decided in
this jurisdiction. It is one of first impression. No cases have been found in this jurisdiction answering
that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of
receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money,
goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term is
used in the statute, signifies the giving of a sum of money, goods or credits to another, with a
promise to repay, but not a promise to return the same thing. To "loan," in general parlance, is to
deliver to another for temporary use, on condition that the thing or its equivalent be returned; or to
deliver for temporary use on condition that an equivalent in kind shall be returned with a
compensation for its use. The word "loan," however, as used in the statute, has a technical meaning.
It never means the return of the same thing. It means the return of an equivalent only, but never the
same thing loaned. A "loan" has been properly defined as an advance payment of money, goods or
credits upon a contract or stipulation to repay, not to return, the thing loaned at some future day in
accordance with the terms of the contract. Under the contract of "loan," as used in said statute, the
moment the contract is completed the money, goods or chattels given cease to be the property of
the former owner and becomes the property of the obligor to be used according to his own will,
unless the contract itself expressly provides for a special or specific use of the same. At all events,
the money, goods or chattels, the moment the contract is executed, cease to be the property of the
former owner and becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the
property does not lose his ownership. He simply loses his control over the property rented during the
period of the contract. In a contract of "loan" the thing loaned becomes the property of the obligor. In
a contract of "rent" the thing still remains the property of the lessor. He simply loses control of the
same in a limited way during the period of the contract of "rent" or lease. In a contract of "rent" the
relation between the contractors is that of landlord and tenant. In a contract of "loan" of money,
goods, chattels or credits, the relation between the parties is that of obligor and obligee. "Rent" may
be defined as the compensation either in money, provisions, chattels, or labor, received by the
owner of the soil from the occupant thereof. It is defined as the return or compensation for the
possession of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return
for their use. It is that, which is to paid for the use of land, whether in money, labor or other thing
agreed upon. A contract of "rent" is a contract by which one of the parties delivers to the other some
nonconsumable thing, in order that the latter may use it during a certain period and return it to the
former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of the same
kind or quantity, in which cases it is called merely a "loan." In the case of a contract of "rent," under
the civil law, it is called a "commodatum."

From the foregoing it will be seen that there is a while distinction between a contract of "loan," as
that word is used in the statute, and a contract of "rent" even though those words are used in
ordinary parlance as interchangeable terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the
use and occupation of the property may depend upon a thousand different conditions; as for
example, farm lands of exactly equal productive capacity and of the same physical value may have a
different rental value, depending upon location, prices of commodities, proximity to the market, etc.
Houses may have a different rental value due to location, conditions of business, general prosperity
or depression, adaptability to particular purposes, even though they have exactly the same original
cost. A store on the Escolta, in the center of business, constructed exactly like a store located
outside of the business center, will have a much higher rental value than the other. Two places of
business located in different sections of the city may be constructed exactly on the same
architectural plan and yet one, due to particular location or adaptability to a particular business which
the lessor desires to conduct, may have a very much higher rental value than one not so located and
not so well adapted to the particular business. A very cheap building on the carnival ground may rent
for more money, due to the particular circumstances and surroundings, than a much more valuable
property located elsewhere. It will thus be seen that the rent to be paid for the use and occupation of
property is not necessarily fixed upon the value of the property. The amount of rent is fixed, based
upon a thousand different conditions and may or may not have any direct reference to the value of
the property rented. To hold that "usury" can be based upon the comparative actual rental value and
the actual value of the property, is to subject every landlord to an annoyance not contemplated by
the law, and would create a very great disturbance in every business or rural community. We cannot
bring ourselves to believe that the Legislature contemplated any such disturbance in the equilibrium
of the business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only to
repurchase. During the period of redemption the purchaser was the absolute owner of the property.
During the period of redemption the vendor was not the owner of the property. During the period of
redemption the vendor was a tenant of the purchaser. During the period of redemption the relation
which existed between the vendor and the vendee was that of landlord and tenant. That relation can
only be terminated by a repurchase of the property by the vendor in accordance with the terms of the
said contract. The contract was one of rent. The contract was not a loan, as that word is used in Act
No. 2655.

As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make
contracts for parties. They made their own contract in the present case. There is not a word, a
phrase, a sentence or paragraph, which in the slightest way indicates that the parties to the contract
in question did not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is explicit,
clear, unambiguous and beyond question. It expresses the exact intention of the parties at the time it
was made. There is not a word, a phrase, a sentence or paragraph found in said contract which
needs explanation. The parties thereto entered into said contract with the full understanding of its
terms and should not now be permitted to change or modify it by parol evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of the
contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action
the right guaranteed to them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with
the law applicable thereto, that the judgment appealed from should be and is hereby affirmed, with
costs. So ordered.

Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-33084 November 14, 1988

ROSE PACKING COMPANY, INC., petitioner,

vs.
THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance
of Rizal (Br. III), PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF
RIZAL, respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated
on December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, this Court hereby renders judgment:

1. Denying the petition to set aside and annul the questioned orders dated January
31, 1969 and May 7,1969 rendered by respondent Judge, the same having been
issued in consonance with the exercise of the Court's discretion.

2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of
ownership over the properties sold at such sale to have been prematurely executed
thereby rendering it void ab initio.

3. In accordance with this Court's resolution dated May 8, 1970, petitioner is hereby
granted sixty (60) days from receipt of a copy of this decision within which to redeem
the properties sold at the foreclosure sale of May 9, 1969.

4. Dismissing the charge of contempt against PCIB and its Executive Vice-President
and General Manager, Eugenio R. Unson,. for lack of merit.

and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its
Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration.

The facts of the case as presented by petitioner and as embodied in the decision of the Court of
Appeals are as follows:
On December 12, 1962 respondent bank (PCIB) approved a letter- request by petitioner for the
reactivation of its overdraft line of P50,000.00, discounting line of P100,000.00 and a letter of credit-
trust receipt line of P550,000.00 as wen as an application for a loan of P300,000.00, on fully secured
real estate and chattel mortgage and on the further condition that respondent PCIB appoint as it did
appoint its executive
vice-president Roberto S. Benedicto as its representative in petitioner's board of directors.

On November 3, 1965 the National Investment & Development Corporation (NIDC), the wholly
owned investment subsidiary of the Philippine National Bank, approved a P2.6 million loan
application of petitioner with certain conditions. Pursuant thereto, the NIDC released to petitioner on
November 7, 1965 the amount of P100,000.00. Subsequently, petitioner purchased five (5) parcels
of land in Pasig, Rizal making a down payment thereon.

On January 5,1966, the NIDC released another P100,000.00 to petitioner and on January 12, 1966,
the aforesaid releases totalling P200,000.00 were applied to the payment of preferred stock which
NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment
scheme as per agreement. Thereafter, the NIDC refused to make further releases on the approved
loan of petitioner.

On August 3, 1966 and October 5, 1966, respondent PCIB approved additional accomodations to
petitioner consisting of a P710,000.00 loan for the payment of the balance of the purchase price of
those lots in Pasig required to be bought, P500,000.00 loan for operating capital, P200,000.00 loan
to be paid directly to petitioner's creditors, while consolidating all previous accommodations at
P1,597,000.00—all of which were still secured by chattel and real estate mortgages. However, PCIB
released only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands
and some P300,000.00 for operating capital.

On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for
a loan of P1,840,000.00 and a guarantee for $652,682.00 for the purchase of can making
equipment. Immediately upon receipt of notice of the approval of the Development Bank of the loan,
petitioner advised respondent PCIB of the availability of P800,000.00 to partially pay off its account
and requested the release of the titles to the Pasig lots for delivery to the Development Bank of the
Philippines. Respondent PCIB verbally advised petitioner of its refusal, stating that all obligations
should be liquidated before the release of the titles to the Pasig properties. Following the PCIB's
rejection of petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela,
Bulacan with the P800,000.00 DBP loan, with the latter's consent.

On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene Knecht, its
president for the collection of petitioner's indebtedness to respondent bank, which complaint was
docketed as Civil Case No. 71697 of the Court of First Instance of Manila.

On January 22, 1968, PCIB gave petitioner notice that it would cause the real estate mortgage to be
foreclosed at an auction sale, which it scheduled for February 27,1968. Thus, respondent Sheriff
served notice of sheriffs sale (of the real properties mortgaged to respondent PCIB) on July 18,1968
at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto. Domingo, municipality of Cainta);
T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio San Joaquin,
Pasig, Rizal). Subsequently, on July 15, 1968, petitioner filed a complaint docketed as Civil Case
No. 11015 in the Court of First Instance of Rizal to enjoin respondents PCIB and the sheriff from
proceeding with the foreclosure sale, to ask the lower court to fix a new period for the payment of the
obligations of petitioner to PCIB and for other related matters. Petitioner likewise prayed, pending
final judgment, for the issuance ex-parte of a writ of preliminary injunction enjoining herein
respondents from proceeding with the foreclosure sale scheduled to be held on July 18, 1968.
On January 31, 1969, the lower court issued ail order denying the application for preliminary
injunction and dissolving its restraining order which had been issued on July 17, 1968. Petitioner
promptly filed a motion for reconsideration which was denied by the lower court on May 7, 1969.

On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with
application for a restraining order and preliminary injunction against the foreclosure sale (Rollo, p.
54). On May 13, 1969 respondent Court resolved to issue a writ of preliminary injunction upon filing
<äre||anº•1àw> 

by petitioner of a bond in the amount of P60,000.00. However, petitioner moved for amendment of
the Order issuing the preliminary injunction, on the ground that the aforementioned resolution of
respondent Court came too late to stop the foreclosure sale which was held on May 9, 1969, praying
instead that the preliminary injunction should now enjoin respondents, particularly respondent
Provincial Sheriff, from proceeding to give effect to the foreclosure sale of May 9, 1969; that said
sheriff should refrain from issuing a deed of certificate of sale pursuant thereto and from registering
the certificate of deed of sale in the Registry of Deeds; and to toll or stop the running of the period of
redemption. Respondent Court resolved to deny said motion in its Resolution dated May 28, 1969
(Rollo, pp. 237-242).

On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty
(60) days from receipt of the decision to be rendered in
CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one
declaring the execution sale in dispute to be valid (Rollo, p. 231).

Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R.

Unson for and in behalf of respondent PCIB concerning the properties involved in the instant petition
for certiorari, was registered with the Register of Deeds of Pasig, Rizal at 8:00 a.m.. Consequently,
the old transfer certificates of title covering the aforementioned properties were cancelled and new
ones issued in the name of respondent PCIB, the buyer at the foreclosure sale. In view thereof,
petitioner filed a motion charging respondent PCIB and its Executive Vice-President and Assistant
General Manager Eugenio R. Unson with contempt of court. Petitioner prayed that (a) the Deed of
Sale dated May 12, 1970 and the consolidation of ownership of the same date be declared null and
void; (b) that the new transfer certificates of title TCT Nos. 286174, 286175, and 286176—be
cancelled and the old ones, TCT Nos. 177019,175595, and 73620 be restored or revived by the
Register of Deeds of Rizal; and (c) that the respondent PCIB be ordered to surrender and deposit
the TCT Nos. 177019, 175595, and 73620 with respondent Court for safekeeping (Rollo. p. 243).

On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249).
On January 12, 1971 it resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated
January 5, 1971 (Rollo, p. 250) and on January 22, 1971 it again resolved (Rollo, p. 281) to deny
petitioner's supplement to motion for reconsideration dated January 18, 1971 (Rollo, p. 260).

The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16,
1971. On February 23, 1971, the Court resolved to give due course to the petition and ordered the
issuance of preliminary injunction enjoining respondents from enforcing or implementing the
appealed decision of respondent Court of Appeals, upon petitioner's posting a bond of P50,000.00
(Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p. 619).

The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents
was filed on September 20, 1971 (Rollo, p. 655). The Reply Brief was filed on December 6, 1971
(Rollo, p. 678).

On April 2, 1971 respondent PCIB filed a motion for leave to lease real estate properties in custodia
legis, more specifically the 31, 447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT
No. 286176 (Rollo, p. 697). Petitioner filed its opposition to the motion on May 27, 1971 (Rollo, p.
712). The reply to the opposition was filed on December 6,1971 (Rollo, p. 730); the rejoinder to
respondent PCIB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case
was transferred to the Second Division, by a Resolution of the First Division dated January 17, 1983
(Rollo, p. 752).

The issues raised in this case are the following:

1. WHETHER OR NOT RESPONDENT COURT ERRED IN FINDING THAT THE

LOWER COURT DID NOT COMMIT AN ABUSE OF DISCRETION IN DENYING
PETITIONER'S APPLICATION FOR A PRELIMINARY INJUNCTION AND
DISSOLVING THE RESTRAINING ORDER PREVIOUSLY ISSUED. (Brief for
Petitioner, pp. 21-47);

2. WHETHER OR NOT RESPONDENT COURT ERRED IN DECLARING VALID

THE FORECLOSURE SALE ON MAY 9,1969 OF THE MORTGAGED
PROPERTIES EN MASSE WHEN THEY REFER TO SEVERAL REAL ESTATE
MORTGAGES EXECUTED ON DIFFERENT DATES. (Brief for Petitioner, pp. 47-
50).

The main issue is whether or not private respondents have the right to the extrajudicial foreclosure
sale of petitioner's mortgaged properties before trial on the merits. The answer is in the negative.

Petitioner filed Civil Case No. 11015 in the Court of First Instance of Rizal, Branch II, to obtain
judgment (1) enjoining defendants (respondents herein) from proceeding with the foreclosure sale of
the subject real estate mortgages, (2) fixing a new period for the payment of the obligations of
plaintiff to defendant PCIB sufficiently long to enable it to recover from the effects of defendant
PCIB's inequitable acts, (3) ordering defendant PCIB to immediately give up management of
plaintiffs canning industry and to pay plaintiff such damages as it may prove in the concept of actual,
compensatory and exemplary or corrective damages, aside from attorney's fees and expenses of
litigation, plus costs (Rollo, p. 98). It is to be noted that petitioner filed the above case mainly to
forestall the foreclosure sale of the mortgaged properties before final judgment. The issuance of a
writ of preliminary injuction could have preserved the status quo of the parties in relation to the
subject matter litigated by them during the pendency of the action (Lasala v. Fernandez, 5 SCRA 79
[1962]; De Lara v. Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969].

When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it
had previously issued, in its order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated
the case before trial on the merits.

While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank
(Brief for Petitioner, pp. 7-11), there were matters that needed the preservation of the status
quo between the parties. The foreclosure sale was premature.

First was the question of whether or not petitioner corporation was already in default. In its letter
dated August 12,1966 to petitioner corporation, among the conditions that respondent bank set for
the consolidation of the outstanding obligations of petitioner was the liquidation of the said
obligations together with the latter's other obligations in the financing scheme already approved by
the NIDC and PDCP. To quote:

a) These facilities shall be temporary and shall be fully liquidated, together with other
obligations from a refinancing scheme already approved by the NIDC and PDCP
 totalling Pl million in equity and P2.6 million in long term financing. In this connection,
the firm shall present to this Bank a certified copy of the terms and conditions of the
approval by the NIDC and PDCP. (Brief for the Respondent, p. 41).

In other words, the loans of petitioner corporation from respondent bank were supposed to become
due only at the time that it receives from the NIDC and PDCP the proceeds of the approved
financing scheme. As it is, the conditions did not happen. NIDC refused to make further releases
after it had made two releases totalling P200,000.00 which were all applied to the payment of the
preferred stock NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00
investment scheme (Brief for Petitioner, p. 9). The efficacy or obligatory force of a conditional
obligation is subordinated to the happening of a future and uncertain event so that if the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never
existed (Gaite v. Fonacier, 2 SCRA 831 [1961]). <äre||anº•1àw>

Petitioner corporation alleges that there had been no demand on the part of respondent bank
previous to its filing a complaint against petitioner and Rene Knecht personally for collection on
petitioner's indebtedness (Brief for Petitioner, p. 13). For an obligation to become due there must
generally be a demand. Default generally begins from the moment the creditor demands the
performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default
will not arise (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973];
Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]). Whether petitioner corporation is already
in default or not and whether demand had been properly made or not had to be determined in the
lower court.

Granting that the findings of the lower court after trial on the merits answer both questions in the
affirmative, another question that had to be determined was the question of cause or consideration.

The loan agreements between petitioner and respondent Bank are reciprocal obligations (the
obligation or promise of each party is the consideration for that of the other Penacio v. Ruaya, 110
SCRA 46 [1981], cited. in Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46
[1985] ). A contract of loan is not a unilateral contract as respondent Bank thinks it is (Brief for the
Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of
respondent bank to furnish the loan (Ibid.).

Respondent bank had complete control of the financial affairs and the management of petitioner
corporation. It appointed its executive vice-president Roberto S. Benedicto as its representative in
petitioner's board of directors, giving him the position of
vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S.
Benedicto as vice-president and member of the board of directors of petitioner corporation on
December 29, 1965 (Brief for Petitioner, p. 8), respondent bank designated Rafael Ledesma as its
representative in petitioner corporation's board of directors, due representation in the board of
petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). In fact, Rafael
Ledesma was designated Chairman of the Board of Directors (Rollo, p. 169). Respondent bank
required petitioner to appoint Sycip, Gorrez, Velayo & Co. as full-time comptroller-treasurer of the
corporation at a monthly salary of P1,500.00 (Brief for Petitioner, p. 9; Brief for the Respondent, p.
41). On January 2, 1967, it also required petitioner to replace its then manager, the Management &
Investment Development Associates (MIDA) and to appoint instead Edmundo Ledesma at a monthly
salary of P3,000.00 and transportation allowance of P1,000.00 plus an assistant manager, Venancio
Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by
defendant's designated manager, no meeting of the board of directors of petitioner was called-
Edmundo Ledesma exercised full control and management (Brief for Petitioner, pp. 10-11; Rollo, p.
167). Respondent Bank has not given up management of petitioner's food canning industry and
continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate
counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied
by respondent bank.

Respondent bank's designation of its own choice of people holding key positions in petitioner
corporation tied the hands of petitioner's board of directors to make decisions for the interest of
petitioner corporation, in fact, undermined the latter's financial stability. During the 18 months of
Edmundo Ledesma's management, petitioner's factory produced some P200,000.00 worth of
canned goods which according to petitioner is only equivalent to its normal production in three
weeks (Brief for Petitioner, pp.10-11). Respondent bank justifies the underproduction by averring
that petitioner at that time did not have sufficient capital to operate the factory, and that said factory
was only operating for the purpose of avoiding spoilage and deterioration of the raw materials then in
store at the petitioner's factory (Rollo. p. 168) and yet respondent bank insists, that it had released
the entire amount of P500,000.00 loan to petitioner (Rollo, p. 167) earmarked for operating capital
purposes (Brief for the Respondent, p. 43) and admits having granted a P40,000.00 loan at a higher
interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo, p.
167). After the Development Bank of the Philippines had approved on June 29, 1967 a loan of
P1,840,000.00 applied for by petitioner in 1961, respondent bank informed of the availability of
P800,000.00 to pay off partially petitioner's account with it and requested to release the titles of the
Pasig parcels for delivery to the Development Bank of the Philippines, and the amount actually
released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's
board of directors wrote a letter to the Development Bank of the Philippines stating that Rene
Knecht, petitioner's president, had no authority to borrow for petitioner, being a mere figurehead
president, although Rene Knecht, controlled 87% of the stockholding of petitioner and the by-laws
authorized the president to borrow for the company (Brief for Petitioner, pp. 11-13). That Rafael
<äre||anº•1àw> 

Ledesma wrote a letter to the Development Bank of the Philippines is admitted by respondent bank
(Rollo, p. 169). The Development Bank of the Philippines refused to make further releases on the
approved loan or to issue the dollar guaranty for the importation of can making machinery. It was
Atty. Juan de Ocampo, the corporate counsel retained by petitioner at the insistence of respondent
bank that instituted the collection suit and
extra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo,
p. 79).

It is apparent that it is respondent bank practically managing petitioner corporation through its
representatives occupying key positions therein. Not even the president of petitioner corporation
could escape control by respondent bank through the Comptroller Treasurer assigned "to
countersign all checks and other disbursements and decide on all financial matters regarding the
operations and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41).
There is basis for petitioner's complaint of interference by respondent bank with petitioner's financing
(Brief for Petitioner, pp. 3132) and such interference is only a consequence of respondent bank's
management of petitioner corporation through the officers occupying key positions therein. Thus, if
ever petitioner corporation was in financial straits instead of being rehabilitated this can be attributed
to the mismanagement of respondent corporation through its representatives in petitioner
corporation.

In a similar case, Filipinas Marble Corporation v. Intermediate Appellate Court (142 SCRA 180
[1986]) where the lending institution took over the management of the borrowing corporation and led
that corporation to bankcruptcy through mismanagement or misappropriation of the funds, defeating
the very purpose of the loan which is to develop the projects of the corporation, the Court ruled that it
is as if the loan was never delivered to it and thus, there was failure on the part of the respondent
DBP to deliver the consideration for which the mortgage and the assignment of deed were executed.
It cannot be determined at this point how much of the total loan, most especially the P500,000.00
loan for operating capital and the P40,000.00 loan of the manager, Edmundo Ledesma, had been
mismanaged or misspent by respondent bank through its representatives. This matter should
rightfully be litigated below in the main action (Filipinas Marble Corportion v. Intermediate Appellate
Court. (supra).

Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan
agreement. By its own admission it failed to release the P710,000.00 loan (Rollo, p. 167) it approved
on October 13, 1966 (Brief for Respondent, p. 44) in which case, petitioner corporation, under Article
1191 of the Civil Code, may choose between specific performance or rescission with damages in
either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]).

As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed
to satisfy its total debt to respondent bank. (Central Bank of the Philippines v. Court of
Appeals, supra.)

The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not
must be answered in the negative. The rule of indivisibility of a real estate mortgage refers to the
provisions of Article 2089 of the Civil Code, which provides:

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

Therefore the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as the debt is not completely
satisfied.

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

From these provisions is excepted the case in which, there being several things
given in mortgage or pledge, each one of them guarantees only a determinate
portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied.

Respondent bank cites the above-quoted article in its argument that the mortgage contract is
indivisible and that the loan it secures cannot be divided among the different lots (Brief for
Respondent, p. 27). Respondent Court upheld the validity of the sale en masse (Rollo, p. 246).

The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor
or creditor which does not obtain in this case (Central Bank of the Philippines v. Court of
Appeals, supra.) Furthermore, granting that there was consolidation of the entire loan of petitioner
corporations approved by respondent bank, the rule of indivisibility of mortgage cannot apply where
there was failure of consideration on the part of respondent bank for the mismanagement of the
affairs of petitioner corporation and where said bank is in default in complying with its obligation to
release to petitioner corporation the amount of P710,000.00. In fact the real estate mortgage itself
becomes unenforceable (Central Bank of the Philippines v. Court of Appeals, supra). Finally, it is
noted that as already stated hereinabove, the exact amount of petitioner's total debt was
still unknown.

PREMISES CONSIDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it
sustained: (a) the lower court's denial of petitioner's application for preliminary injunction and (b) the
validity of the foreclosure sale; (2) the lower court is ordered to proceed with the trial on the merits of
the main case together with a determination of exactly how much are petitioner's liabilities in favor of
respondent bank PCIB so that proper measures may be taken for their eventual liquidation; (3) the
preliminary injunction issued by this Court on April 28, 1971 remains in force until the merits of the
main case are resolved; and (4) the motion of respondent bank dated April 1, 1981 for leave to lease
the real properties in custodia legis is DENIED.

SO ORDERED.

G.R. No. 103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,

vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.

VITUG, J.:p

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be
contracted or incurred? This question is the core issue in the instant petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber &
Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel
mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by
way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in
the chattel mortgage agreement was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms thereof,
then this mortgage shall be null and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either as

a renewal of the former note, as an extension thereof, or as a new loan, or is given
any other kind of accommodations such as overdrafts, letters of credit, acceptances
and bills of exchange, releases of import shipments on Trust Receipts, etc., this
mortgage shall also stand as security for the payment of the said promissory note or
notes and/or accommodations without the necessity of executing a new contract and
this mortgage shall have the same force and effect as if the said promissory note or
notes and/or accommodations were existing on the date thereof. This mortgage shall
also stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of this
mortgage.  1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00.   These2

borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one
million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to
financial constraints, the loan was not settled at maturity.   Respondent bank thereupon applied for
3

an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan
City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a
prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil
Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the
chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel
mortgage.

Petitioner corporation appealed to the Court of Appeals   which, on 14 August 1991, affirmed, "in all
4

respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January
1992.

The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this
Court for having been insufficient in form and substance. Private respondent filed a motion to
dismiss the petition while petitioner corporation filed a compliance and an opposition to private
respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but
granted a second motion for reconsideration, thereby reinstating the petition and requiring private
respondent to comment thereon.  5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed   which the
6

Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of
right but of sound judicial discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog
the docket and needlessly consume the time of the Court. These technical and procedural rules,
however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective for, after all, the
dispensation of justice is the core reason for the existence of courts. In this instance, once again, the
Court is constrained to relax the rules in order to give way to and uphold the paramount and
overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty
or a suretyship, the faithful performance of the obligation by the principal debt or is secured by
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the
execution of the corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real property covered thereby;
and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit — upon the essential condition that if the obligation becomes
due and the debtor defaults, then the property encumbered can be alienated for the payment of the
obligation,   but that should the obligation be duly paid, then the contract is automatically
7

extinguished proceeding from the accessory character   of the agreement. As the law so puts it, once
8

the obligation is complied with, then the contract of security becomes, ipso facto, null and void.  9
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described,   a chattel mortgage, however,
10

can only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old contract conformably
with the form prescribed by the Chattel Mortgage Law.   Refusal on the part of the borrower to
11

execute the agreement so as to cover the after-incurred obligation can constitute an act of default on
the part of the borrower of the financing agreement whereon the promise is written but, of course,
the remedy of foreclosure can only cover the debts extant at the time of constitution and during the
life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof,
is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to
the agreement, the chattel mortgage would still be valid between the parties (not against
third persons acting in good faith  ), the fact, however, that the statute has provided that the
12

parties to the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud.  13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet
merely contemplated. In the chattel mortgage here involved, the only obligation specified in
the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later
fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian Catholic
Missionaries, Inc., vs. Magallanes Press, Inc., et al.,   the Court
14

said —

. . . A mortgage that contains a stipulation in regard to future advances in the credit

will take effect only from the date the same are made and not from the date of the
mortgage.  15

The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan,   there no longer was any chattel mortgage that could cover the new loans that were
16

concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial
court for a specific finding on the amount of damages it has sustained "as a result of the unlawful
action taken by respondent bank against it."  7 This prayer is not reflected in its complaint which has
1

merely asked for the amount of P3,000,000.00 by way of moral damages.   In LBC Express,
18

Inc. vs. Court of Appeals,   we have said:

19

Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
 suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent
bank as an artificial person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has
merely been so named as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It
instead turned out to be, however, a source of disappointment for this Court to read in petitioner's
reply to private respondent's comment on the petition his so-called "One Final Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent
Court of Appeals should be required to justify its decision which completely
disregarded the basic laws on obligations and contracts, as well as the clear
provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly unacceptable, this
Honorable Court should impose appropriate sanctions on the erring justices. This is
one positive step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate
jurisdiction.   (Emphasis supplied.)
21

The statement is not called for. The Court invites counsel's attention to the admonition
in Guerrero vs. Villamor;   thus:
22

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the
respect due to the courts of justice and judicial officers and . . . (to) insist on similar
conduct by others." This respectful attitude towards the court is to be observed, "not
for the sake of the temporary incumbent of the judicial office, but for the maintenance
of its supreme importance." And it is through a scrupulous preference for respectful
language that a lawyer best demonstrates his observance of the respect due to the
courts and judicial officers . . . 23

The virtues of humility and of respect and concern for others must still live on even in an age
of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside
without prejudice to the appropriate legal recourse by private respondent as may still be warranted
as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the
courts.

SO ORDERED.
G.R. No. 59255 December 29, 1995

OLIVIA M. NAVOA and ERNESTO NAVOA, petitioners,

vs.
COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO DOMDOMA, respondents.

BELLOSILLO, J.:

Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision of the Court of
Appeals  which "modified" the order of the trial court dismissing the complaint for lack of cause of
1

action. The appellate court remanded the case to the court a quo for private respondents to file their
responsive pleading and for trial on the merits.

On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action
against petitioners for collection of various sums of money based on loans obtained by the latter. On
3 January 1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint
stated no cause of action and that plaintiffs had no capacity to sue.

After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the
trial court dismissed the case. A motion to reconsider the dismissal was denied.

On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December
1980 modified the order of dismissal "by returning the records of this case for trial on the merits,
upon filing of an answer subject to the provisions of Articles 1182 and 1197 of the Civil Code for the
first cause of action. The other causes of action should be tried on the merits subject to the defenses
the defendants may allege in their answer."

The instant petition alleges that respondent court erred: (a) in not dismissing the appeal for lack of
appellate jurisdiction over the case which involves merely a question of law; (b) in not affirming the
order of dismissal for lack of cause of action; and, (c) in holding that private respondents have a
cause of action under the second to the sixth causes of action of the complaint. 2
We cannot sustain the petition. Petitioners are now estopped from assailing the appellate jurisdiction
of the Court of Appeals after receiving an adverse judgment therefrom.  Having participated actively
3

in the proceedings before the appellate court, petitioners can no longer question its authority.

Petitioners submit that private respondents failed to specify in their complaint a fixed period within
which petitioners should pay their obligations; that instead of stating that petitioners failed to
discharge their obligations upon maturity private respondents sought to collect on the checks which
were issued to them merely as security for the loans; and, that private respondents failed to make a
formal demand on petitioners to satisfy their obligations before filing the action.

For a proper determination of whether the complaint filed by private respondents sufficiently stated a
cause of action, we shall examine the relevant allegations in the complaint, to wit:

Allegations Common To All Causes of Actions

xxx xxx xxx

3. That sometime in . . . February, 1977, when the Reycard Duet was in Manila,
plaintiff Teresita got acquainted with defendant Olivia in the jewelry business, the
former selling the jewelries of the latter; that to the Reycard Duet alone, plaintiff
Teresita sold jewelries worth no less than ONE HUNDRED TWENTY THOUSAND
(P120,000.00) PESOS in no less than twenty (20) transactions; that even when the
Reycards have already left, their association continued, and up to the month of
August, 1977, plaintiff Teresita sold for defendant Olivia jewelries worth no less than
TWENTY THOUSAND (P20,000.00) PESOS, in ten (10) transactions more or less;

xxx xxx xxx

5. That sometime in the month of June and July of 1977, defendant Olivia, on two
occasions, asked for a loan from plaintiff Teresita, for the purpose of investing the
same in the purchase of jewelries, which loan were secured by personal checks of
the former; that in connection with these loans, defendant promised plaintiff a
participation in an amount equivalent to one half (1/2) of the profit to be realized; that
on these loans, plaintiff was given a share in the amount of P1,200.00 in the first
transaction, and in the second transaction, the sum of P950.00;

First Cause of Action

6. That on August 15, 1977, defendant Olivia got from plaintiff Teresita, one diamond
ring, one and one half (1-1/2) karats, heart shape, valued in the amount of Fifteen
thousand (P15,000.00) Pesos; that as a security for the said ring, Olivia issued a
Philippine Commercial and Industrial Bank Check, San Sebastian Branch, dated
August 15, 1977, No. 13894, copy of which is hereto attached and made a part
hereof as Annex "A";

7. That the condition of the issuance of the check was — if the ring is not returned
within fifteen (15) days from August 15, 1977, the ring is considered sold; that after
fifteen days, plaintiff Teresita asked defendant Olivia if she could deposit the check,
and the answer of defendant Olivia was — hold it for sometime, until I tell you to
deposit the same; that the check was held until the month of November, 1977, and
when deposited, it was dishonored for lack of sufficient funds; that for the reason that
the aforementioned check was not honored when deposited, defendant Olivia should
be held liable for interest at the rate of one percent a month, from date of issue, until
the same is fully paid;

Second Cause of Action

8. That on August 25, 1977, plaintiff Teresita extended a loan to the herein defendant
Olivia in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No.
14307, dated Sept. 25, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "B";

9. That this loan was extended upon representation of defendant Olivia that she
needed money to pay for jewelries which she can resell for a big profit; that having
established her goodwill, by reason of the transaction mentioned in par. "5" hereof,
the loan was extended by plaintiff;

10. That this check, Annex "B", when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest at the rate of one percent (1%) per month, from the date of issue
until fully paid;

Third Cause of Action

11. That on August 27, 1977, plaintiff extended to defendant Olivia a loan in the
amount of FIVE THOUSAND PESOS (P5,000.00), secured by a Philippine
Commercial & Industrial Bank check, PCIBANK Singalong Branch, No. 14308, dated
Sept. 27, 1977, photo copy of which is hereto attached and made a part hereof as
Annex "C";

12. That this loan was extended on the same representation made by defendant
Olivia, stated in par. "9", under the terms and conditions stated in par. "5" hereof;

13. That the check Annex "C", has not as yet been paid up to now, hence, defendant
Olivia should be held liable for interest at the rate of one percent (1%) monthly, from
date of issue, until fully paid;

Fourth Cause of Action

14. That on August 30, 1977, plaintiff Teresita, extended a loan in favor of defendant
Olivia, in the amount of Five Thousand (P5,000.00) Pesos, secured by a Philippine
Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No. 14311,
dated Sept. 30, 1977, photo copy of which is hereto attached and made a part hereof
as Annex "D";

15. That this loan was extended on the same representation made by defendant
Olivia, as stated in par. "9" hereof, under the terms and conditions stated in par. "5"
hereof;
16. That this check, Annex "D" has not as yet been paid up to now, hence, she
should be held liable for interest thereon at the rate of one percent (1%) per month,
from date of issue, until fully paid;

Fifth Cause of Action

17. That on Sept. 15, 1977, plaintiff Teresita extended a loan in favor of defendant
Olivia, in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial & Industrial Bank check, PCIBANK Singalong Branch, No.
14320, dated October 15, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "E";

18. That this loan was given on the same representation made by defendant Olivia,
stated on par. "9" hereof, and under the terms and conditions stated in par. "5"
hereof;

19. That this check Annex "E" when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest at the rate of one percent (1%) monthly, from date of issue, until
fully paid;

Sixth Cause of Action

20. That on Sept. 27, 1977, plaintiff Teresita extended a loan to defendant Olivia, in
the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine
Commercial & Industrial Bank check, No. 14325, dated October 27, 1977, photo
copy of which is hereto attached and made a part hereof as Annex "F";

21. That this loan was given on the same representation made by defendant Olivia,
stated in par. "9" hereof, and under the terms and conditions stated in par. "5" hereof;

22. That this check, Annex F, when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest thereon, at the rate of one percent (1%) monthly, from date of issue,
until fully paid;

Seventh Cause of Action

23. That plaintiff, by reason of the two transactions in par. "5" hereof, reposed trust
and confidence on defendant Olivia, however, by virtue of these trust and
confidence, she availed of the same in securing the loans aforementioned by
misrepresentations, and as a direct consequence thereof, the loans have not as yet
been settled up to now, for which plaintiff Teresita suffered sleepless nights, mental
torture and wounded feelings, for the reason that the money used in said
transactions do all belong to her; that this situation is further aggravated by the
malicious act of defendant Olivia, by having filed a complaint with the Manila Police,
to the effect that she (Teresita) stole the checks involved in this case; that as a
consequence thereof, she was investigated and she suffered besmirched reputation,
social humiliation, wounded feelings, moral shock and similar injuries, for which
defendant Olivia should be held liable, as and by way of moral damages in the
amount of EIGHTY THOUSAND (P80,000.00) PESOS;
 Eight Cause of Action

24. That as and by way of exemplary or corrective damages, to serve as an example

or correction for the public good, defendant Olivia should be held liable to pay to the
herein plaintiff Teresita, the amount of Ten Thousand Pesos, as exemplary
damages;

Ninth Cause of Action

25. That plaintiff, in order to protect her rights and interests, engaged the services of
the undersigned, and she committed herself to pay the following:

a. The amount of P200.00 for every appearance in the trial of this case.

b. The amount of P2,000.00 as retainers fees.

c. An amount equivalent to ten percent of any recover from defendant.

On the basis of the allegations under the heading Allegations Common to all Causes of Action above
stated as well as those found under the First Cause of Action to the Ninth Cause of Action, should
the complaint be dismissed for want of cause of action?

A cause of action is the fact or combination of facts which affords a party a right to judicial
interference in his behalf. The requisites for a cause of action are: (a) a right in favor of the plaintiff
by whatever means and under whatever law it arises or is created, (b) an obligation on the part of
the defendant to respect and not to violate such right; and, (c) an act or omission on the part of the
defendant constituting a violation of the plaintiff's right or breach of the obligation of the defendant to
the plaintiff.  Briefly stated, it is the reason why the litigation has come about; it is the act or omission
4

of defendant resulting in the violation of someone's right. 5

In determining the existence of a cause of action, only the statements in the complaint may properly
be considered. Lack of cause of action must appear on the face of the complaint and its existence
may be determined only by the allegations of the complaint, consideration of other facts being
proscribed and any attempt to prove extraneous circumstances not being allowed.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what
petitioners did in the case at bar, he is regarded as having hypothetically admitted all the averments
thereof. The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant and material
facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the
allegations in a complaint furnish sufficient basis by which the complaint can be maintained, the
same should not be dismissed regardless of the defense that may be assessed by the defendants. 6

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that
petitioner Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security
therefor a check for the same amount dated 15 August 1977 with the condition that if the ring was
not returned within fifteen (15) days the ring would be considered sold; and, after the lapse of the
period, private respondent Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa
requested the former not to deposit it in the meantime; that when Teresita Domdoma deposited the
check after holding it for sometime the same was dishonored for lack of funds. Private respondent
Teresita Domdoma sought to collect the amount of P15,000.00 plus interest from 15 August 1977
until fully paid.

From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August
1977 and despite the sale the latter failed to pay the price therefor even as the former was given
ample time to pay the agreed amount covered by a check. Clearly, respondent Teresita Domdoma's
right under the agreement with petitioner Olivia Navoa was violated by the latter.

In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates. All these loans were secured by separate checks
intended for each amount of loan obtained and dated one month after the contracts of loan were
executed. That when these checks were deposited on their due dates they were all dishonored by
the bank. As a consequence, private respondents prayed that petitioners be ordered to pay the
amounts of the loans granted to them plus one percent interest monthly from the dates the checks
were dishonored until fully paid.

Culled from the above, the right of private respondents to recover the amounts loaned to petitioners
is clear. Moreover, the corresponding duty of petitioners to pay private respondents is undisputed.
The question now is whether Petitioners committed an act or omission constituting a violation of the
right of private respondents.

All the loans granted to petitioners are secured by corresponding checks dated a month after each
loan was obtained. In this regard, the term security is defined as a means of ensuring the
enforcement of an obligation or of protecting some interest in property. It may be personal, as when
an individual becomes a surety or a guarantor; or a property security, as when a mortgage, pledge,
charge, lien, or other device is used to have property held, out of which the person to be made
secure can be compensated for loss.  Security is something to answer for as a promissory
7

note.  That is why a secured creditor is one who holds a security from his debtor for payment of a
8

debt.  From the allegations in the complaint there is no other fair inference than that the loans were
9

payable one month after they were contracted and the checks issued by petitioners were drawn to
answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations.
Hence, private respondents filed the action with the trial court precisely to compel petitioners to pay
their due and demandable obligations. Art. 1169 of the Civil Code is explicit — those obliged to
deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation. The continuing refusal of petitioners to heed
the demand of private respondents stated in their complaint unmistakably shows the existence of a
cause of action on the part of the latter against the former.

Quite obviously, the trial court erred in dismissing the case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in remanding the case to the trial court for the filing
of an answer by petitioners and to try the case on the merits.

WHEREFORE, the petition is DENIED. The judgment of the Court of Appeals dated 11 December
1980 remanding the case to the trial court for the filing of petitioners' answer and thereafter for trial
on the merits is AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. 136202             January 25, 2007

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, Respondents

DECISION

AZCUNA, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the
Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals
in CA-G.R. CV No. 42241.

The facts3 are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money with
damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before
Branch 156 of the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by
substituting the name of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar
Construction and Engineering Services. Private respondent Salazar prayed for the recovery of the
amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy
Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for
damages and attorney’s fees.

Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party
defendant and herein also a private respondent, demanded from the former payment of the amount
of Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos
(P267,692.50) representing the aggregate value of three (3) checks, which were allegedly payable to
him, but which were deposited with the petitioner bank to private respondent Salazar’s account
(Account No. 0203-1187-67) without his knowledge and corresponding endorsement.
Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48
of A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67
where the checks were deposited, since this account was already closed by private respondent
Salazar or had an insufficient balance.

Private respondent Salazar was advised to settle the matter with Templonuevo but they did not
arrive at any settlement. As it appeared that private respondent Salazar was not entitled to the funds
represented by the checks which were deposited and accepted for deposit, petitioner BPI decided to
debit the amount of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50
was paid to Templonuevo by means of a cashier’s check. The difference between the value of the
checks (P267,692.50) and the amount actually debited from her account (P267,707.70) represented
bank charges in connection with the issuance of a cashier’s check to Templonuevo.

In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to
him of P267,692.50 and argued that said payment was to correct the malicious deposit made by
private respondent Salazar to her private account, and that petitioner bank’s negligence and
tolerance regarding the matter was violative of the primary and ordinary rules of banking. He likewise
contended that the debiting or taking of the reimbursed amount from the account of private
respondent Salazar by petitioner BPI was a matter exclusively between said parties and may be
pursuant to banking rules and regulations, but did not in any way affect him. The debiting from
another account of private respondent Salazar, considering that her other account was effectively
closed, was not his concern.

After trial, the RTC rendered a decision, the dispositive portion of which reads thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private
respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as
follows:

1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the
said amount is fully paid;

2. The amount of P30,000.00 as and for actual damages;

3. The amount of P50,000.00 as and for moral damages;

4. The amount of P50,000.00 as and for exemplary damages;

5. The amount of P30,000.00 as and for attorney’s fees; and

6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of factual basis.

The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.

Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is hereby likewise

DISMISSED for lack of factual basis.

SO ORDERED.4
On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent
Salazar was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement
thereon by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that
the checks payable to JRT Construction and Trading5 actually belonged to Salazar and would be
deposited to her account, with petitioner acquiescing to the arrangement.6

Petitioner therefore filed this petition on these grounds:

I.

The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable
Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II.

The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278
and 1290 of the Civil Code in favor of BPI.

III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts,
that the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a
separate and distinct personality.

IV.

The Court of Appeals committed a reversible error in holding, based entirely on speculations,
surmises or conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO
that checks payable to TEMPLONUEVO may be deposited by SALAZAR to her personal account
and that BPI was privy to this agreement.

V.

The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises
or conjectures, that SALAZAR suffered great damage and prejudice and that her business standing
was eroded.

VI.

The Court of Appeals erred in affirming instead of reversing the decision of the lower court against
BPI and dismissing SALAZAR’s complaint.

VII.

The Honorable Court erred in affirming the decision of the lower court dismissing the third-party
complaint of BPI.7

The issues center on the propriety of the deductions made by petitioner from private respondent
Salazar’s account. Stated otherwise, does a collecting bank, over the objections of its depositor,
have the authority to withdraw unilaterally from such depositor’s account the amount it had
previously paid upon certain unendorsed order instruments deposited by the depositor to another
account that she later closed?

Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the
possession of a person who is neither a payee nor the indorsee thereof, has been lawfully
transferred for value. Hence, the CA should not have presumed that Salazar was a
transferee for value within the contemplation of Section 49 of the Negotiable Instruments
Law,8 as the latter applies only to a holder defined under Section 191of the same.9

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three
checks was lawful despite her allegations that these checks were deposited pursuant to a
prior internal arrangement with Templonuevo and that petitioner was privy to the
arrangement.

3. The CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazar’s account, petitioner was merely rectifying the
undue payment it made upon the checks and exercising its prerogative to alter or modify an
erroneous credit entry in the regular course of its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper even though the value of the checks had been originally credited to the
personal account of Salazar because A.A. Salazar Construction and Engineering Services,
an unincorporated single proprietorship, had no separate and distinct personality from
Salazar.

5. Assuming the deduction from Salazar’s account was improper, the CA should not have
dismissed petitioner’s third-party complaint against Templonuevo because the latter would
have the legal duty to return to petitioner the proceeds of the checks which he previously
received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The
CA’s conclusion that the deductions from the bank account of A.A. Salazar Construction and
Engineering Services were improper stemmed from its finding that there was no ineffective payment
to Salazar which would call for the exercise of petitioner’s right to set off against the former’s bank
deposits. This finding, in turn, was drawn from the pleadings of the parties, the evidence adduced
during trial and upon the admissions and stipulations of fact made during the pre-trial, most
significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount
of P57,712.50;

(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount
of P55,180.00; and,
 (3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for
the amount of P154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to the
order of JRT Construction and Trading, the name and style under which Templonuevo does
business;

(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar
was able to deposit the checks in her personal savings account with petitioner and encash
the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over a
span of eight months in 1990; and

(e) That Templonuevo only protested the purportedly unauthorized encashment of the
checks after the lapse of one year from the date of the last check.10

Petitioner concedes that when it credited the value of the checks to the account of private
respondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon
by the designated payee. The CA, however, did not lend credence to this claim and concluded that
petitioner’s actions were deliberate, in view of its admission that the "mistake" was committed three
times on three separate occasions, indicating acquiescence to the internal arrangement between
Salazar and Templonuevo. The CA explained thus:

It was quite apparent that the three checks which appellee Salazar deposited were not indorsed.
Three times she deposited them to her account and three times the amounts borne by these checks
were credited to the same. And in those separate occasions, the bank did not return the checks to
her so that she could have them indorsed. Neither did the bank question her as to why she was
depositing the checks to her account considering that she was not the payee thereof, thus allowing
us to come to the conclusion that defendant-appellant BPI was fully aware that the proceeds of the
three checks belong to appellee.

For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely
that appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three
separate times nary any question. Banks are most finicky over accepting checks for deposit without
the corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for
deposit if the depositor is not one they know very well.11

The CA likewise sustained Salazar’s position that she received the checks from Templonuevo
pursuant to an internal arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the plaintiff over the three
questioned checks, it baffles us why it was only on August 31, 1991 or more than a year after the
third and last check was deposited that he demanded for the refund of the total amount of
P267,692.50.

A prudent man knowing that payment is due him would have demanded payment by his debtor from
the moment the same became due and demandable. More so if the sum involved runs in hundreds
of thousand of pesos. By and large, every person, at the very moment he learns that he was
deprived of a thing which rightfully belongs to him, would have created a big fuss. He would not have
waited for a year within which to do so. It is most inconceivable that Templonuevo did not do this.12
Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules
of Court.13 Factual findings of the CA are entitled to great weight and respect, especially when the
CA affirms the factual findings of the trial court.14 Such questions on whether certain items of
evidence should be accorded probative value or weight, or rejected as feeble or spurious, or whether
or not the proofs on one side or the other are clear and convincing and adequate to establish a
proposition in issue, are questions of fact. The same holds true for questions on whether or not the
body of proofs presented by a party, weighed and analyzed in relation to contrary evidence
submitted by the adverse party may be said to be strong, clear and convincing, or whether or not
inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said
proofs weight – all these are issues of fact which are not reviewable by the Court.15

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion
is a finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made
is manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when
the judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f)
when the CA, in making its findings, went beyond the issues of the case and the same are contrary
to the admissions of both appellant and appellee; g) when the findings of the CA are contrary to
those of the trial court; h) when the findings of fact are conclusions without citation of specific
evidence on which they are based; i) when the finding of fact of the CA is premised on the supposed
absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion.16

In the present case, the records do not support the finding made by the CA and the trial court that a
prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of
the checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on
the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable
Instruments Law.

Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or
indorsee delivers a negotiable instrument for value without indorsing it, thus:

Transfer without indorsement; effect of- Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the right to have the indorsement of
the transferor. But for the purpose of determining whether the transferee is a holder in due course,
the negotiation takes effect as of the time when the indorsement is actually made. 17

It bears stressing that the above transaction is an equitable assignment and the transferee acquires
the instrument subject to defenses and equities available among prior parties. Thus, if the transferor
had legal title, the transferee acquires such title and, in addition, the right to have the indorsement of
the transferor and also the right, as holder of the legal title, to maintain legal action against the
maker or acceptor or other party liable to the transferor. The underlying premise of this provision,
however, is that a valid transfer of ownership of the negotiable instrument in question has taken
place.

Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they
are neither payees nor indorsees of such instruments. The weight of authority is that the mere
possession of a negotiable instrument does not in itself conclusively establish either the right of the
possessor to receive payment, or of the right of one who has made payment to be discharged from
liability. Thus, something more than mere possession by persons who are not payees or indorsers of
the instrument is necessary to authorize payment to them in the absence of any other facts from
which the authority to receive payment may be inferred.18

The CA and the trial court surmised that the subject checks belonged to private respondent Salazar
based on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding
reimbursement for the proceeds of the same. To the Court’s mind, however, such period of delay is
not of such unreasonable length as to estop Templonuevo from asserting ownership over the checks
especially considering that it was readily apparent on the face of the instruments19 that these were
crossed checks.

In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1)
that the check may not be encashed but only deposited in the bank; (2) that the check may be
negotiated only once - to one who has an account with a bank; and (3) that the act of crossing the
check serves as a warning to the holder that the check has been issued for a definite purpose so
that such holder must inquire if the check has been received pursuant to that purpose.

Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s
possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s
favor as the designated payee therein was sufficiently overcome. This is consistent with the principle
that if instruments payable to named payees or to their order have not been indorsed in blank, only
such payees or their indorsees can be holders and entitled to receive payment in their own right.21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was
given for a sufficient consideration will not inure to the benefit of Salazar because the term "given"
does not pertain merely to a transfer of physical possession of the instrument. The phrase "given or
indorsed" in the context of a negotiable instrument refers to the manner in which such instrument
may be negotiated. Negotiable instruments are negotiated by "transfer to one person or another in
such a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated
by delivery. If payable to order it is negotiated by the indorsement completed by delivery."22 The
present case involves checks payable to order. Not being a payee or indorsee of the checks,
private respondent Salazar could not be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrument
without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to
prior holders to require possessors to prove without the aid of an initial presumption in their favor,
that they came into possession by virtue of a legitimate transaction with the last holder.23 Salazar
failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore
warranted under the circumstances despite the fact that Templonuevo may not have clearly
demonstrated that he never authorized Salazar to deposit the checks or to encash the same.
Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior
endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had
ascertained the genuineness of all prior endorsements. Having assumed the liability of a general
indorser, petitioner’s liability to the designated payee cannot be denied.

Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the
value of the checks it previously credited in her favor. It is of no moment that the account debited by
petitioner was different from the original account to which the proceeds of the check were credited
because both admittedly belonged to Salazar, the former being the account of the sole
proprietorship which had no separate and distinct personality from her, and the latter being her
personal account.

The right of set-off was explained in Associated Bank v. Tan:24

A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals
on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a
dishonored check that has previously been credited has fairly been established by jurisprudence. To
begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the
requisites mentioned in Article 1279 are present," as follows:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to
Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely
different matter.25 As businesses affected with public interest, and because of the nature of their
functions, banks are under obligation to treat the accounts of their depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.26 In this regard, petitioner was clearly
remiss in its duty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the encashment of these checks three times on three
separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the
value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner
recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same,
contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty
of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The collecting bank, being primarily engaged in
banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high
standard of conduct.27 The taking and collection of a check without the proper indorsement amount
to a conversion of the check by the bank.28

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of
the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the
name of the sole proprietorship of Salazar without even serving due notice upon her. This ran
contrary to petitioner’s assurances to private respondent Salazar that the account would remain
untouched, pending the resolution of the controversy between her and Templonuevo.29 In this
connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager
of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing her that her
account had been frozen, thus:
From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48
will remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in
an unexpected move, in less than two weeks (eleven days to be precise) from the time that letter
was written, [petitioner] bank issued a cashier’s check in the name of Julio R. Templonuevo of the
J.R.T. Construction and Trading for the sum of P267,692.50 (Exhibit "8") and debited said amount
from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be frozen or controlled. Such a
move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton and reckless
disregard of the right of its depositor.

The records further bear out the fact that respondent Salazar had issued several checks drawn
against the account of A.A. Salazar Construction and Engineering Services prior to any notice of
deduction being served. The CA sustained private respondent Salazar’s claim of damages in this
regard:

The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of
A.A. Salazar Construction and Engineering Services caused plaintiff-appellee great damage and
prejudice particularly when she had already issued checks drawn against the said account. As can
be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits
photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991
(Exhibits "D", "E" and "F" respectively)30

These checks, it must be emphasized, were subsequently dishonored, thereby causing private
respondent Salazar undue embarrassment and inflicting damage to her standing in the business
community. Under the circumstances, she was clearly not given the opportunity to protect her
interest when petitioner unilaterally withdrew the above amount from her account without informing
her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the
CA against petitioner. This whole incident would have been avoided had petitioner adhered to the
standard of diligence expected of one engaged in the banking business. A depositor has the right to
recover reasonable moral damages even if the bank’s negligence may not have been attended with
malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and
humiliation.31 Moral damages are not meant to enrich a complainant at the expense of defendant. It
is only intended to alleviate the moral suffering she has undergone. The award of exemplary
damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith
or gross negligence. The award of reasonable attorney’s fees is proper where exemplary damages
are awarded. It is proper where depositors are compelled to litigate to protect their interest.32

WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and
Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241
are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of
Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to
respondent Annabelle A. Salazar, which portion is REVERSED and SET ASIDE. In all other
respects, the same are AFFIRMED.

No costs.

SO ORDERED.
G.R. No. L-43191             November 13, 1935

PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.

Jose Delgado for defendant-appellant.

MALCOLM, J.:

Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which
sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal interest
and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the defendant
to be absolved totally from the amended complaint. As it is conceded that the plaintiff has already
received the sum represented by the United States treasury, warrant, which is in question, the
appeal will thus determine the amount, if any, which should be paid to the plaintiff by the defendant.

The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a
member of the Philippine Bar, resident in the City of Cebu. The second named is a banking
corporation with a branch in the same city. Attorney Gullas has had a current account with the bank.

It appears from the record that on August 2, 1933, the Treasurer of the United States for the United
States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco
Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it
was cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by
the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against
this balance he had issued certain cheeks which could not be paid when the money was
sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which
could not be delivered to him at that time because he was in Manila. In the bank's letter of August
21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United
States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722,
the payment for which had been received has been returned by our Manila office with the notation
that the payment of his check has been stopped by the Insular Treasurer. "In view of this therefore
we have applied the outstanding balances of your current accounts with us to the part payment of
the foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on
August 31, 1933, notice of dishonor was received and the unpaid balance of the United States
Treasury warrant was immediately paid by him.

As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney

Gullas. In the first place, as above indicated, checks including one for his insurance were not paid
because of the lack of funds standing to his credit in the bank. In the second place, periodicals in the
vicinity gave prominence to the news to the great mortification of Gullas. lawphil.net

A variety of incidental questions have been suggested on the record which it can be taken for
granted as having been adversely disposed of in this opinion. The main issues are two, namely, (1)
as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank
and (2) as to the amount damages, if any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et
seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when
two persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his
connection, it has been held that the relation existing between a depositor and a bank is that of
creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the liability of a general indorser
and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument
engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it
has been held a long line of authorities that notice of dishonor is in order to charge all indorser and
that the right of action against him does not accrue until the notice is given. (Asia Banking
Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is
denied, and it is held that a bank has no right, without an order from or special assent of the
depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the
Louisiana doctrine is the theory of confidential contracts arising from irregular deposits, e. g., the
deposit of money with a banker. With freedom of selection and after full preference to the minority
rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed.,
sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code
Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8
Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)

Starting, therefore, from the premise that the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact
we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any
action by Gullas, the bank made use of the money standing in his account to make good for the
treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a
third party, it has been held that he has a right of action against the bank for its refusal to pay such a
check in the absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann.
Cas., 203.) The decision cited represents the minority doctrine, for on principle it would seem that
notice is not necessary to a maker because the right is based on the doctrine that the relationship is
that of creditor and debtor. However this may be, as to an indorser the situation is different, and
notice should actually have been given him in order that he might protect his interests.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow
up that statement with others proving exact damages is not so easy. For instance, for alleged
libelous articles the bank would not be primarily liable. The same remark could be made relative to
the loss of business which Gullas claims but which could not be traced definitely to this occurrence.
Also Gullas having eventually been reimbursed lost little through the actual levy by the bank on his
funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave
for Manila, and on return find that those checks had not been cashed because of the action taken by
the bank. That caused a disturbance in Gullas' finances, especially with reference to his insurance,
which was injurious to him. All facts and circumstances considered, we are of the opinion that Gullas
should be awarded nominal damages because of the premature action of the bank against which
Gullas had no means of protection, and have finally determined that the amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the
result that the judgment of the trial court will be modified by sentencing the defendant to pay the
plaintiff the sum of P250, and the costs of both instances.

Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

G.R. No. 205578

GEORGIA OSMEÑA-JALANDONI, Petitioner
vs
CARMEN A. ENCOMIENDA, Respondent

DECISION

PERALTA, J.:

This is an appeal from the Decision  of the Court of Appeals, Cebu City (CA) dated March 29, 2012
1

and its Resolution  dated December 19, 2012 in CA-G.R. CV No. 01339 which set aside the
2

Decision  of the Cebu Regional Trial Court (RTC), Branch 57, dated January 9, 2006, dismissing
3

respondent Carmen Encomienda's claim for sum of money.

The facts, as shown by the records of the case, are as follows:

Encomienda narrated that she met petitioner Georgia Osmeña-Jalandoni in Cebu on October 24,
1995, when the former was purchasing a condominium unit and the latter was the real estate broker.
Thereafter, Encomienda and Jalandoni became close friends. On March 2, 1997, Jalandoni called
Encomienda to ask if she could borrow money for the search and rescue operation of her children in
Manila, who were allegedly taken by their father, Luis Jalandoni. Encomienda then went to
Jalandoni's house and handed ₱l00,000.00 in a sealed envelope to the latter's security guard. While
in Manila, Jalandoni again borrowed money for the following errands: 4

1âwphi1

1. Publication in SunStar Daily of Georgia's missing children ₱l1,000.00

2. Reproduction of the pictures of Georgia's children 720.00
3. Additional reproduction of pictures 1,350.00
4. Plane fare for Georgia's secretary to Manila 3,196.00
5. Allowance of Germana Berning in going to Manila 4,080.00
6. Cash airbill of Kabayan Forwarders 49.50
7. Cash airbill of Kabayan Forwarders 49.50
8. Salary of Georgia's household helper Reynilda Atillo for March 16-31, 1997 750.00
9. Salary of Georgia's driver Billy Tano for March 16-31, 1997 2,000.00
10. Petty cash for Germana Berning 250.00
11. Consultancy fee of Germana Berning 7,000.00
12. Filing fee of case filed by Georgia against CIS 100,500.00
13. Cebu cable bill per receipt No. 197743 380.00
14. Cebu cable bill per receipt No. 197742 380.00
15. Bankard bill of Georgia 840.00
16. Services of 2 security guards for 2/1-15/97 and 3/1-31/97 14,715.00
17. One sack of rice and gasoline 1,270.00
18. Food allowance for Georgia's household and payment for food ordered 2,900.00
19. Shipping charge of immigration papers sent to Georgia in Manila 145.45
20. Shipping charge of cellphone and easy call pager sent to Georgia 145 .45
21. Salary of Georgia's helper Renilda Atillo from April 1-15, 1997 750.00
22. Purchase of cellphone registered in the name of Encomienda's sister, Paz 10,260.00
23. Pager acquired on April 10, 1997 upon Georgia's request 6,351.00
24. Wanted ad in Panay News and expenses of Georgia's secretary 8,500.00
25. Salary of Billy Tano from April 1-15, 1997 2,000.00
26. Water consumption of Georgia's house in Paradise Village 1,120.00
2 7. Services of security guard from April 1-15, 1997 4,905.00
28. Telephone bill for Georgia's residential phone from March 25 to April 24, 1997 3,609.77
29. Telephone bill for Georgia's other telephone line 440.20
30. Plane ticket for Georgia's psychic friends $1,570.00
31. Petty cash for GRO Co. owned by Georgia 3,150.00
32. Bill of cellphone under the name of Paz Encomienda 5,468.70
33. Another bill of cellphone used by Georgia 3,923.87
34. Cost of reproduction of pictures 2,500.00
35. Salary of driver and house help of Georgia from May 15-31, 1997 3,250.00
36. Service charge of Georgia's cellphone number 550.00
 37. Ritual performed in Georgia's house to drive away evil spirits 17,500.00
38. Prayers for Georgia's missing children 5,500.00
39. Amount given to priest who performed a blessing of the house of Georgia 500.00
40. Globe cellular phone bill of Georgia as of 5/10/97 7,957.24
41. Salary of Germana Berning for May 1997 6,000.00
42. Amount given to priest for mass and blessing 2,500.00
43. Cash given to G. Berning for payment of Georgia's phone bill 3,000.00
44. Gasoline for Georgia's car paid on 6/10/97 per cash slip #221088 150.00
45. Gasoline for Georgia's car paid on 6/10/97 per cash slip #220997 379.44
46. Bill for Georgia's Easycall pager 1,605.09
47. Security guard services for May 16-31 4,905.00
48. Globe bill for cellular phone from April 18, 1997 to May 17, 1997 5,543.98
49. Bill of cellular phone registered in the name of Paz Encomienda but used by 14,169.21
Georgia paid on June 18, 1997
50. Charge for changing the cap of Easycall pager on June 21, 1997 275.00
51. Monthly bill for Georgia's Easycall pager from 7 /15/97 to 10/14/97 1,551.00
52. Water bill for April-May 1997 paid on June 25, 1997 1,728.31
53. Cebu Cable bill paid on 6125197 380.00
54. PLDT bill for the telephone in Georgia's residence 2,097.98
55. Electric bill paid on 6/25/97 1,964.43
56. Purchase of steel cabinet on 6/25/97 2,750.00
57. Airbill of JRS in sending the cap of Easycall pager 20.00
58. Bill for the cellphone in the name of Paz Encomienda but used by Georgia, 8,630.11
June to July 8, 1997
59. Penalty for downgrading of executive line of cellphone 1,045.00
60. Globe cellphone bill paid on 9/10/97 1,903.00
61. Charge for downgrading of cellphone plan from Advantage to Basic 660.00
62. Penalty for Easycall 11/17/97 1,248.50

On April 1, 1997, Jalandoni borrowed ₱l Million from Encomienda and promised that she would pay
the same when her money in the bank matured. Thereafter, Encomienda went to Manila to attend
the hearing of Jalandoni's habeas corpus case before the CA where ₱100,000.00 more was
requested. On May 26, 1997, now crying, Jalandoni asked if Encomienda could lend her an
additional ₱900,000.00. Encomienda still acceded, albeit already feeling annoyed. All in all,
Encomienda spent around ₱3,245,836.02 and $6,638.20 for Jalandoni.
When Jalandoni came back to Cebu on July 14, 1997, she never informed Encomienda.
Encomienda then later gave Jalandoni six (6) weeks to settle her debts. Despite several demands,
no payment was made. Jalandoni insisted that the amounts given were not in the form of loans.
When they had to appear before the Barangay for conciliation, no settlement was reached. But a
member of the Lupong Tagapamayapa of Barangay Kasambagan, Laureano Rogero, attested that J
alandoni admitted having borrowed money from Encomienda and that she was willing to return it.
Jalandoni said she would talk to her lawyer first, but she never came back. Hence, Encomienda filed
a complaint. She impleaded Luis as a necessary party, being Georgia's husband.

For her defense, Jalandoni claimed that there was never a discussion or even just an allusion about
a loan. She confirmed that Encomienda would indeed deposit money in her bank account and pay
her bills in Cebu. But when asked, Encomienda would tell her that she just wanted to extend some
help and that it was not a loan. When Jalandoni returned to Cebu, Encomienda wanted to fetch her
at the airport but the former refused. This allegedly made Encomienda upset, causing her to
eventually demand payment for the amounts originally intended to be gratuitous.

On January 9, 2006, the RTC of Cebu City dismissed Encomienda's complaint, the dispositive
portion of which states:

WHEREFORE, in view of the foregoing, this case is hereby dismissed.

SO ORDERED. 5

Therefore, Encomienda brought the case to the CA. On March 29, 2012, the appellate court granted
the appeal and reversed the RTC Decision, to wit:

WHEREFORE, the defendant-appellant's appeal is GRANTED. The decision of the trial court dated
January 9, 2006 is hereby REVERSED and SET ASIDE and in its stead render judgment against
defendant-appellee Georgia Osmefia-Jalandoni ordering the latter to pay plaintiff-appellant Carmen
A. Encomienda the following:

1. The sum of Three Million Two Hundred Forty-Five Thousand Eight Hundred Thirty-Six
(₱3,245,836.02) Pesos and 02/100 and Six Thousand Six Hundred Thirty-Eight (US$6,638.20) US
Dollars and 20/100;

2. Legal interest of Twelve (12%) Percent from August 14, 1997 the date of extrajudicial demand.

3. Attorney's fees and expenses of litigation in the amount of One Hundred Thousand (₱l 00,000.00)
Pesos.

Let a copy of this Decision be served upon defendants-appellees through their respective counsels.
The Division Clerk of Court is directed to furnish a copy of this Decision to plaintiff-appellant who, to
date, has yet to submit the name of her new counsel following the death of appellant's original
counsel ofrecord, Atty. Richard W. Sison.

SO ORDERED. 6

Jalandoni filed a motion for reconsideration, but the same was denied.  Hence, the instant petition.
7

The sole issue in this case is whether or not Encomienda is entitled to be reimbursed for the
amounts she defrayed for Jalandoni.
Jalandoni insists that she never borrowed any amount of money from Encomienda. During the entire
time that Encomienda was sending hermoney and paying her bills, there was not one reference to a
loan. In other words, Jalandoni would have the Court believe that Encomienda volunteeredto spend
about ₱3,245,836.02 and $6,638.20 of her hard-earned money in a span of eight (8) months for her
and her family simply out of pure generosity and the kindness of her heart, without expecting
anything in return. Suchpresupposition is incredible, highly unusual, and contrary to common
experience, unless the benefactor is a billionaire philanthropist who usuallyspends his days
distributing his fortune to the needy. It is a notable fact that Jalandoni was married to one of the
richest hacienderos of Iloilo and belongto the privileged and affluent Osmeña family, being the
daughter of the late Senator Sergio Osmeña, Jr. Clearly then, Jalandoni is not one to be aconvincing
object of anyone's charitable acts, especially not from someone like Encomienda who has not been
endowed with such wealth and powerful pedigree.

The appellate court aptly pointed out that when Encomienda gave a Barbie doll to Jalandoni's
daughter, she was quick to send a letter acknowledging receipt and thanking Encomienda for the
simple gift. However, not once did Jalandoni ever send a simple note or letter, let alone a card,
expressing her gratitude towards Encomienda for the countless instances she received various
amounts of money supposedly given to her as gifts.

Jalandoni also contends that the amounts she received from Encomienda were mostly provided and
paid without her prior knowledge and thus she could not have consented to any loan agreement.
She relies on the trial court's finding that Encomienda's claims were not supported by any
documentary evidence. It must be stressed, however, that the trial court merely found that no
documentary evidence was offered showing Jalandoni's authorization or undertaking to pay the
expenses. But the second paragraph of Article 1236 of the Civil Code provides:

xxxx

Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor. 8

Clearly, Jalandoni greatly benefited from the purportedly unauthorized payments. Thus, even if she
asseverates that Encomienda's payment of her household bills was without her knowledge or
against her will, she cannot deny the fact that the same still inured to her benefit and Encomienda
must therefore be consequently reimbursed for it. Also, when Jalandoni learned about the payments,
she did nothing to express her objection to or repudiation of the same, within a reasonable time.
Even when she claimed that she was prepared with her own money,  she still accepted the financial
9

assistance and actually made use of it. While she asserts to have been upset because of
Encomienda's supposedly intrusive actions, she failed to protest and, in fact, repeatedly accepted
money from her and further allowed her to pay her driver, security guard, househelp, and bills for her
cellular phone, cable television, pager, gasoline, food, and other utilities. She cannot, therefore, deny
the benefits she reaped from said acts now that the time for restitution has come. The debtor who
knows that another has paid his obligation for him and who does not repudiate it at any time, must
corollarily pay the amount advanced by such third person. 10

The RTC likewise harped on the fact that if Encomienda really intended the amounts to be a loan,
nonnal human behavior would have prompted at least a handwritten acknowledgment or a
promissory note the moment she parted with her money for the purpose of granting a loan. This
would be particularly true if the loan obtained was part of a business dealing and not one extended
to a close friend who suddenly needed monetary aid. In fact, in case of loans between friends and
relatives, the absence of acknowledgment receipts or promissory notes is more natural and real. In a
similar case,  the Court upheld the CA' s pronouncement that the existence of a contract of loan
11

cannot be denied merely because it was not reduced in writing. Surely, there can be a verbal loan.
Contracts are binding between the parties, whether oral or written. The law is explicit that contracts
shall be obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present. A simple loan or mutuum exists when a person receives a
loan of money or any other fungible thing and acquires its ownership. He is bound to pay to the
creditor the equal amount of the same kind and quality. Jalandoni posits that the more logical reason
behind the disbursements would be what Encomiendacandidly told the trial court, that her acts were
plainly an "unselfish display of Christian help" and done out of "genuine concern for Georgia's
children." However, the "display of Christian help" is not inconsistent with theexistence of a loan.
Encomienda immediately offered a helping hand when a friend asked for it. But this does not mean
that she had already waived herright to collect in the future. Indeed, when Encomienda felt that
Jalandoni was beginning to avoid her, that was when she realized that she had to protect her right to
demand payment. The fact that Encomienda kept the receipts even for the smallest amounts she
had advanced, repeatedly sent demand letters, and immediately filed the instant case when
Jalandoni stubbornly refused to heed her demands sufficiently disproves the latter’s belief that all the
sums of money she received were merely given out of charity.

Truly, Jalandoni herself admitted that she received the aforementioned amounts from Encomienda
and is merely using her lack of authorization over the payments as her defence. In fact, Lupong
Tagapamayapa member Rogero, a disinterested third party, confirmed this, saying that during
the barangay conciliation, Jalandoni indeed admitted having borrowed money from Encomienda and
that she would return it. Jalandoni, however, reneged on said promise.

The principle of unjust enrichment finds application in this case. Unjust enrichment exists when a
person unfairly retains a benefit to the loss of another, or when a person retains money or property
of another against the fundamental principles of justice, equity, and good conscience. There is unjust
enrichment under Article 22 of the Civil Code when (1) a person is unjustly benefited, and (2) such
benefit is derived at the expense of or with damages to another. The principle of unjust enrichment
essentially contemplates payment when there is no duty to pay, and the person who receives the
payment has no right to receive it.  The CA is then correct when it ruled that allowing Jalandoni to
12

keep the amounts received from Encomienda will certainly cause an unjust enrichment on Jalandoni'
s part and to Encomienda's damage and prejudice.

WHEREFORE, PREMISES CONSIDERED, the Court DISMISSES the petition for lack of merit

and AFFIRMS the Decision of the Court of Appeals, Cebu City dated March 29, 2012 and its
Resolution dated December 19, 2012 in CA-G.R. CV No. 01339, with MODIFICATION as to the
interest which must be twelve percent (12%) per annum of the amount awarded from the time of
demand on August 14, 1997 to June 30, 2013, and six percent (6%)  per annum from July 1, 2013
13

until its full satisfaction.

SO ORDERED.
 [G.R. No. 26218. January 29, 1927.]

RAMON A. AREVALO, as administrator of the estate of Catalino Arevalo,

deceased, Plaintiff-Appellee, v. J. F. DIMAYUGA, Defendant-Appellant.

Sebastian C. Pamatmat for Appellant.

Santos & Benitez for Appellee.

SYLLABUS

1. EVIDENCE. — The rule of evidence is well established, that the protest or objection
against the admission of evidence should be presented at the time the evidence is
offered, and that the proper time to make protest or objection to the admissibility of
evidence is when the question is presented to the witness or at the time the answer
thereto is given. It is also a well established rule of evidence, that the court may, in its
discretion, strike out incompetent evidence although such evidence was given without
objection and although the motion to strike out is not made until the evidence is
already in.

2. ID.; RIGHT OF COURT ON ITS OWN MOTION TO STRIKE OUT. — The court may,
upon its own motion, strike out evidence improperly admitted at any time during the
day of the trial or at anytime before the close of the trial. It has also been held, that the
court, upon its own motion, even during the closing argument of the counsel, may
strike out evidence improperly admitted. Parties to the action are not precluded from
asking the court to discard irrelevant or inadmissible evidence, even though it had been
previously admitted without objection.

3. ID.; CONVERSATIONS WITH DECEASED PERSONS. — A party to an action against an

executor or administrator of a deceased person, upon a claim against the estate of the
latter, is absolutely prohibited by law from giving testimony concerning such claim or
demand, as to anything that occurred before the death of the person against whose
estate the action is presented. Death has closed the lips of one party and the law has
 closed the lips of the other.

4. USURY; WHEN MAY BE INTERPOSED AS A DEFENSE. — Without deciding the

question whether or not there existed usury under the facts in the present case, or
whether or not usury can exist in any case like the present, it is sufficient to say in the
present case that no recovery for usury can be had in any case unless the action for
that purpose "is brought within two years after such payment or delivery" is made. In
the present case no claim was made for the recovery of any of the alleged usurious
amounts for a period of more than three years. Query: May the defense of usury ever
be based upon the amount of rent paid by the vendor to the vendee under a pacto de
retro, during the continuance of said contract of sale?

DECISION

JOHNSON, J.:

This action was commenced in the Court of First Instance of the City of Manila on the
24th day of April, 1925. Its purpose was to recover the possession of a certain piece of
property located at 622 Calle Regidor in the City of Manila, together with the rent
thereon for the years 1922, 1923, 1924, and up to and including the month of April,
1925, in a sum amounting to P8,066.66.

The defendant interposed a general and special defense. In his special defense he
alleged that the property in question was his sole and separate property; that he had
given said property to the deceased Catalino Arevalo as a guaranty for the payment of
a loan of P20,000 on the 12th day of October, 1920; that the document executed,
evidencing said loan, while in form was a pacto de retro, was in fact a mere loan and
that the promise to pay rent in said contract was a mere promise to pay interest on
said loan at 12 per cent per annum; that at the time of the execution and delivery of
said document the deceased Catalino Arevalo collected from the defendant the sum of
P150 as a supposed commission; that the contract of January 27, 1922, referred to in
paragraph 5 of the complaint was also fictitious and that he had signed the same by
virtue of a verbal agreement to extend the time for the repayment of the P20,000 for
two months and the payment by the defendant to the plaintiff of P600 additional each
year, in addition to the rent already agreed upon, making a total rental of the property
in question of P3,000 per year for the use and occupation thereof; that he had paid to
Catalino Arevalo the sum of P3,311.09; that the said contracts of the 12th day of
October, 1920, and the 27th day of January, 1922, were contrary to the provisions of
Act No. 2655, known as the Usury Law. The defendant prayed for a judgment against
the plaintiff for the sum of P2,000 as attorney’s fees in the trial court and an additional
sum of P3,000 as attorney’s fees in case of an appeal, as well as for a judgment against
the plaintiff for the sum of P3,311.09. He also prayed that he be absolved from all
liability under the complaint and that said contracts be declared null and void. He
further prayed that the registrar of titles to land in the City of Manila be ordered to
cancel the registration of the title of said property in the name of Catalino Arevalo.

Upon the issue thus presented the cause was brought on for trial. After hearing the
evidence adduced during the trial of the cause the Honorable C. A. Imperial, judge, in a
very well prepared opinion, in which reference was made to all of the important facts,
rendered a judgment, the dispositive part of which is as follows: jgc:chanrobles.com.ph

"Fundado en las consideraciones que preceden, el Juzgado dicta sentencia a favor del
demandante, en su capacidad de administrador judicial del intestado del finado D.
Catalino Arevalo, declarandole dueiio de la finca urbana cuestionada y con derecho a
poseerla, y se ordena al demandado que le restituya dicha finca urbana y que le pague
la cantidad de ocho mil sesenta y seis pesos con sesenta y seis centimos (P8,066.66)
que representan los alquileres correspondientes desde el 1. º de enero de 1922 hasta el
30 de abril de 1925, inclusive, mas los alquileres correspondientes desde el 1. º de
mayo de 1925 hasta la fecha de la restitucion de la propiedad, a razon de P250 al mes
ademas de los intereses legales sobre todas dichas cantidades a partir desde el 26 de
abril de 1925, fecha en que se presento la demanda, y las costas. Se sobreseen las
reconvenciones y contrademandas del demandado.

"Asi se ordena." cralaw virtua1aw library

From that judgment the defendant appealed and presents several assignments of error.

In his first assignment of error he contends that the lower court committed an error in
excluding certain testimony given by the defendant during the trial of the cause. The
testimony in question relates to certain conversations which the defendant is supposed
to have had with Catalino Arevalo during his lifetime. The appellant admits that the
testimony in question was not admissible under the provisions of paragraph 7 of section
383 of the Code of Procedure in Civil Actions. He argues, however, that inasmuch as
there was no objection presented to the admissibility of said testimony at the time it
was presented, the motion which the plaintiff presented thereafter to have the same
excluded was too late. He contends that the lower court committed an error in granting
the motion of the plaintiff to strike said testimony from the record.

The rule of evidence is well established, that the protest or objection against the
admission of evidence should be presented at the time the evidence is offered and that
the proper time to make protest or objection to the admissibility of evidence is when
the question is presented to the witness or at the time the answer thereto is given. It is
also a well established rule of evidence that the court may, in its discretion, strike out
incompetent evidence although such evidence was given without objection and
although the motion to strike out is not made until the evidence is already in. (38 Cyc.,
1407; Edisto Phosphate Co. v. Stanford, 112 Ala., 493; In re Lasak, 131 N. Y., 624.)

The court may also, upon its own motion, strike out evidence improperly admitted at
any time during the day of the trial or at any time before the close of the trial. It has
also been held that the court, upon its own motion, even during the closing argument
of the counsel, may strike out evidence improperly admitted. Parties to the action are
not precluded from asking the court to discard irrelevant and inadmissible evidence
even though it had been previously admitted without objection.

It may be added, however, that the testimony of the defendant, while relating to a
conversation which he had with Catalino Arevalo during his lifetime, could have had but
little bearing upon the questions presented. But whatever the testimony was and
whatever bearing it might have had upon the questions presented for solution, it should
not have been admitted, and was properly stricken out by the trial court. A party to an
action against an executor or administrator of a deceased person, upon a claim against
the estate of the latter, is absolutely prohibited by law from giving testimony
concerning such claim or demand as to anything that occurred before the death of the
person against whose estate the action is presented. Death has closed the lips of one
party and the law has closed the lips of the other. (Maxilom v. Tabotabo, 9 Phil., 390,
Kiel v. Estate of P. S. Sabert, 46 Phil., 193; Anderson v. Laugen, 122 Wis., 57; Jones
on Evidence vol. 4, 628-630.)

We find nothing in the first assignment of error which in any way justifies a modification
of the judgment appealed from.

In his second assignment of error the appellant alleges that the lower court committed
an error in dismissing his counterclaim and in not admitting the same in accordance
with the provisions of section 9 of Act No. 2655. In support of his second assignment of
error the appellant claims that inasmuch as the plaintiff had not answered his
counterclaim under oath, the facts alleged therein had been admitted and could not
thereafter be denied. Act No. 2655 is an act fixing rates of interest upon loans and
declaring the effect of receiving or taking usurious rates and for other purposes. Section
9 of said Act provides that the person or corporation sued shall file its answer in writing
under oath to the complaint brought or filed against said person or corporation before a
competent court to recover the money or other personal or real property, seeds or
agricultural products, charged or received in violation of the provisions of that Act. The
lack (omission) of taking an oath of an answer to a complaint will mean the admission
of the facts contained in the latter.

Without deciding the question whether or not there existed usury, or whether or not
usury can exist in cases like the present, it is sufficient to say in the present case that
no recovery for usury can be had in any case unless the action for that purpose "is
brought within two years after such payment or delivery" is made. In the present case
no claim was made for the recovery of any of the alleged usurious amounts for a period
of more than three years after said alleged illegal payments had been made. (Sec., Act
No. 2655, as amended by section 4 of Act No. 3291.)

For a clearer understanding of the questions presented in this case we deem it

advisable to set out the actual contractual relations between the parties.

On the 12th day of October, 1920, the defendant J. F. Dimayuga sold to Catalino
Arevalo, under a pacto de retro, a piece of property located at 622 Calle Regidor in the
District of Santa Cruz of the City of Manila for the sum of P20,000, with the right to
repurchase the same at the same price within a period of two years counted from the
20th day of October, 1920. The same contract provided that during the period for the
repurchase of said property the said J. F. Dimayuga should pay to Catalino Arevalo for
the use and occupation of said property the sum of P200 per month, payable in
advance during the first five days of each and every month at the residence of the said
Arevalo. The contract further provided that in case the vendor (J. F. Dimayuga) should
fail to pay the said rent for a period of two consecutive months, that he would thereby
lose the right to repurchase said property.
On the 27th day of January, 1922, by mutual agreement between the vendor and the
purchaser of said property the said contract of the 12th day of October, 1920, was
amended. By the terms of said original contract it was stipulated that the time within
which the vendor could repurchase said property would expire upon the 12th day of
October, 1922. Said amended contract stipulated that the period for the repurchase of
the property in question should be extended until the 12th day of October, 1924. Said
amended contract further stipulated that, in case the said Catalino Arevalo should need
the price fixed in the sale of said property, he could fix the time for the repurchase of
the same by giving to the vendor four months’ notice in advance. In the said amended
contract it was stipulated that, except for said amendments, the original contract
should remain in full force and effect. The vendor J. F. Dimayuga having failed to pay
the rent for a period of more than two months the title to said property was
consolidated, under the terms of the contract, in the purchaser Catalino Arevalo.

That the contract between Catalino Arevalo and the defendant dated October 12, 1920,
was a pacto de retro, is not only proved by the form of the contract itself but by the
admission of the defendant made during the trial of the present cause. He admitted
that the contract was a pacto de retro and that he knew that it was such a contract.
That the defendant knew at the time he signed said contract that it was a pacto de
retro and not a loan, is also proved by witnesses who were present at the time he
signed it. The witness Mariano de Leon testified that the defendant desired that the
contract be a pacto de retro and not a loan. There is absolutely no proof in the record
that justifies the claim of the defendant that the contract was a contract for the loan of
money and not a pacto de retro.

The certificate of title under the Torrens system which the defendant held to the
property in question (transfer certificate No. 14331) was turned over to Catalino
Arevalo at the time the contract in question was made. Later said transfer certificate
together with the contract in question was presented to the registrar of titles of the City
of Manila after the condition for the repurchase of the property, and a new certificate of
title was issued to him (transfer certificate No. 23794). It results, therefore, from the
facts of the record, that the defendant, after he had executed the contract in question
on the 12th day of October, 1920, in which he sold to Catalino Arevalo the property in
question with the right to repurchase, became a mere lessee of the property and his
only rights were (a) To repurchase the same within the period mentioned in said
contract, (b) to occupy it as a tenant and (c) his obligation was to pay rent in
accordance with the term of the contract.

What has been said above with reference to the facts relating to the execution of said
contract and its terms and provisions and the resulting obligations therefrom on the
part of the defendant, is a sufficient answer to the contention of the appellant in his
third assignment of error relating to his liability upon said contract. The judgment of the
court below, refusing to declare null and void the amended contract of the 27th day of
January, 1922, is fully supported not only by said contract but by the oral evidence
adduced during the trial of the cause.

With reference to the fourth assignment of error, in which the appellant alleges that the
lower court committed an error in not granting his motion for reconsideration, it may be
said that nothing has been found in the record nor in the allegations of the parties
which in any way would have justified the lower court in granting said motion. No error
was committed therefore in denying the same.

After a careful examination of the entire record in relation with the judgment rendered
by the lower court and the assignments of error presented by the appellant, we find no
reason nor justification for changing or modifying the judgment appealed from. The
same is therefore hereby affirmed, with costs. So ordered.

Street, Malcolm, Villamor, Ostrand, Romualdez and Villa Real, JJ., concur.

SPOUSES DAVID B. CARPO G.R. Nos. 150773 &

and RECHILDA S. CARPO, 153599

Petitioners,

Present:

- versus - PUNO, J.,

Chairman,

AUSTRIA-MARTINEZ,

CALLEJO, SR.,

ELEANOR CHUA and TINGA, and

ELMA DY NG, CHICO-NAZARIO, JJ.

Respondents.

Promulgated:

September 30, 2005

x-------------------------------------------------------------------x
 

DECISION
 

TINGA, J.:

Before this Court are two consolidated petitions for review. The first, docketed as
G.R. No. 150773, assails the Decision [1] of the Regional Trial Court (RTC), Branch
26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge
Filemon B. Montenegro dismissed the complaint [2] for annulment of real estate
mortgage and consequent foreclosure proceedings filed by the spouses David B.
Carpo and Rechilda S. Carpo (petitioners).

The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals' Decision [3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of
Appeals Third Division annulled and set aside the orders of Judge Corazon A.
Tordilla to suspend the sheriff's enforcement of the writ of possession.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6)
months with an interest rate of six percent (6%) per month. To secure the payment
of the loan, petitioners mortgaged their residential house and lot situated at San
Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of
Title (TCT) No. 23180. Petitioners failed to pay the loan upon demand.
Consequently, the real estate mortgage was extrajudicially foreclosed and the
mortgaged property sold at a public auction on 8 July 1996. The house and lot was
awarded to respondents, who were the only bidders, for the amount of Three
Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty
Centavos (P367,457.80).

 
Upon failure of petitioners to exercise their right of redemption, a certificate of sale
was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was
cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said house and
lot, prompting respondents to file a petition for writ of possession with the RTC
docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
Ernesto A. Miguel issued an Order [4] for the issuance of a writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate

mortgage and the consequent foreclosure proceedings, docketed as Civil Case No.
99-4376 of the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven
Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos
(P257,197.26) with the RTC.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon

motion on 3 August 1999, enjoining the enforcement of the writ of possession. In
an Order [5] dated 6 January 2000, the RTC suspended the enforcement of the writ
of possession pending the final disposition of Civil Case No. 99-4376. Against
this Order, respondents filed a petition for certiorari and mandamus before the
Court of Appeals, docketed as CA-G.R. SP No. 57297.

During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it
was filed out of time and barred by laches. The RTC proceeded from the premise
that the complaint was one for annulment of a voidable contract and thus barred by
the four-year prescriptive period. Hence, the first petition for review now under
consideration was filed with this Court, assailing the dismissal of the complaint.

The second petition for review was filed with the Court after the Court of Appeals on
30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the
ground that it was the ministerial duty of the lower court to issue the writ of
possession when title over the mortgaged property had been consolidated in the
mortgagee.

This Court ordered the consolidation of the two cases, on motion of petitioners.

In G.R. No. 150773, petitioners claim that following the Court's ruling in Medel v.
Court of Appeals [6] the rate of interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage. Notably, while
petitioners were silent in their petition on the issues of prescription and laches on
which the RTC grounded the dismissal of the complaint, they belatedly raised the
matters in their Memorandum. Nonetheless, these points warrant brief comment.

On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not
commit any grave abuse of discretion when it issued the orders dated 3 August
1999 and 6 January 2000, and that these orders could not have been 'the proper
subjects of a petition for certiorari and mandamus' . More accurately, the justiciable
issues before us are whether the Court of Appeals could properly entertain the
petition for certiorari from the timeliness aspect, and whether the appellate court
correctly concluded that the writ of possession could no longer be stayed.

We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per
annum is so excessive, iniquitous, unconscionable and exorbitant that it should
have been declared null and void. Instead of dismissing their complaint, they aver
that the lower court should have declared them liable to respondents for the
original amount of the loan plus 12% interest per annum and 1% monthly penalty
charge as liquidated damages, [7] in view of the ruling in Medel v. Court of
Appeals. [8]
 

In Medel,  the Court found that the interest stipulated at 5.5% per month or 66%
per annum was so iniquitous or unconscionable as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals (contra bonos mores'), if
not against the law. The stipulation is void. The Court shall reduce
equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable. [9]

In a long line of cases, this Court has invalidated similar stipulations on interest
rates for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v.
Salazar, [10] we annulled the stipulation of 6% per month or 72% per annum
interest on a P60,000.00 loan. In Imperial v. Jaucian, [11] we reduced the interest
rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of
Appeals, [12] we equitably reduced the agreed 3% per month or 36% per annum
interest to 1% per month or 12% per annum interest. The 10% and 8% interest
rates per month on a P1,000,000.00 loan were reduced to 12% per annum
in Cuaton v. Salud. [13] Recently, this Court, in Arrofo v. Quino, [14] reduced the
7% interest per month on a P15,000.00 loan amounting to 84% interest per annum
to 18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From
that perspective, it is apparent that the stipulated interest in the subject loan is
excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of
contract principle embodied in Article 1306 of the Civil Code, contracting parties
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. In the ordinary course, the codal provision may be invoked
to annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per
annum. By the standards set in the above-cited cases, this stipulation is similarly
invalid. However, the RTC refused to apply the principle cited and employed
in Medel on the ground that Medel  did not pertain to the annulment of a real estate
mortgage, [15] as it was a case for annulment of the loan contract itself. The
question thus sensibly arises whether the invalidity of the stipulation on interest
carries with it the invalidity of the principal obligation.

The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration
of the mortgage contract is the same as that of the principal contract from which it
receives life, and without which it cannot exist as an independent contract. Being a
mere accessory contract, the validity of the mortgage contract would depend on the
validity of the loan secured by it. [16]

Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to
the more reasonable rate of 12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed by the Court
in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

The Court's ultimate affirmation in the cases cited of the validity of the principal
loan obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity
but defective only with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious
interest. [17] However, this Court adopted the contrary rule,

as comprehensively discussed in Briones v. Cammayo: [18]

 

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise
declared that, in any event, the debtor in a usurious contract of loan
should pay the creditor the amount which he justly owes him, citing in
support of this ruling its previous decisions in Go Chioco,  Supra,  Aguilar
vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil.
739.
 
....
 
 
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We
also held that the standing jurisprudence of this Court on the question
under consideration was clearly to the effect that the Usury Law, by its
letter and spirit, did not deprive the lender of his right to recover from the
borrower the money actually loaned to and enjoyed by the latter. This
Court went further to say that the Usury Law did not provide for the
forfeiture of the capital in favor of the debtor in usurious contracts, and
that while the forfeiture might appear to be convenient as a drastic
measure to eradicate the evil of usury, the legal question involved should
not be resolved on the basis of convenience.
 
Other cases upholding the same principle are Palileo vs. Cosio, 97
Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199,
200-202. In the latter We expressly held that when a contract is found to
be tainted with usury "the only right of the respondent (creditor) . . . was
merely to collect the amount of the loan, plus interest due thereon."
 
The view has been expressed, however, that the ruling thus
consistently adhered to should now be abandoned because Article 1957 of
the new Civil Code ' a subsequent law ' provides that contracts and
stipulations, under any cloak or device whatever, intended to circumvent
the laws against usury, shall be void, and that in such cases "the borrower
may recover in accordance with the laws on usury." From this the
conclusion is drawn that the whole contract is void and that, therefore,
the creditor has no right to recover ' not even his capital.
 
 The meaning and scope of our ruling in the cases mentioned
heretofore is clearly stated, and the view referred to in the preceding
paragraph is adequately answered, in Angel Jose, etc. vs. Chelda
Enterprises, et al. (L-25704, April 24, 1968). On the question of whether
a creditor in a usurious contract may or may not recover the principal of
the loan, and, in the affirmative, whether or not he may also recover
interest thereon at the legal rate, We said the following:
 
....
 
Appealing directly to Us, defendants raise two
questions of law: (1) In a loan with usurious interest, may
the creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?"
 
Great reliance is made by appellants on Art. 1411 of
the New Civil Code . . . .
 
Since, according to the appellants, a usurious loan is void due
to illegality of cause or object, the rule of pari delicto
expressed in Article 1411, supra, applies, so that neither
party can bring action against each other. Said rule, however,
appellants add, is modified as to the borrower, by express
provision of the law (Art. 1413, New Civil Code), allowing the
borrower to recover interest paid in excess of the interest
allowed by the Usury Law. As to the lender, no exception is
made to the rule; hence, he cannot recover on the contract.
So ' they continue ' the New Civil Code provisions must be
upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961
of the New Civil Code, that: "Usurious contracts shall be
governed by the Usury Law and other special laws, so far as
they are not inconsistent with this Code."
 
We do not agree with such reasoning. Article 1411 of
the New Civil Code is not new; it is the same as Article 1305
of the Old Civil Code. Therefore, said provision is no warrant
for departing from previous interpretation that, as provided in
the Usury Law (Act No. 2655, as amended), a loan with
usurious interest is not totally void only as to the interest.
 
. . . [a]ppellants fail to consider that a contract of
loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the
debt; the accessory stipulation is to pay interest
thereon.
 
And said two stipulations are divisible in the
sense that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The
renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall
leave the former in force."
 
The question therefore to resolve is whether the
illegal terms as to payment of interest likewise renders
a nullity the legal terms as to payments of the principal
debt. Article 1420 of the New Civil Code provides in
this regard: "In case of a divisible contract, if the
illegal terms can be separated from the legal ones, the
latter may be enforced."
 
In simple loan with stipulation of usurious
interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract
(Article 1350, Civil Code), is not illegal. The illegality
lies only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only should
be deemed void, since it is the only one that is illegal.
 
....
 
The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial action.
And in case of such demand, and the debtor incurs in delay,
the debt earns interest from the date of the demand (in this
case from the filing of the complaint). Such interest is not
 due to stipulation, for there was none, the same being void.
Rather, it is due to the general provision of law that in
obligations to pay money, where the debtor incurs in delay,
he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering
defendants to pay the principal debt with interest thereon at
the legal rate, from the date of filing of the complaint." [19]

The Court's wholehearted affirmation of the rule that the principal obligation
subsists despite the nullity of the stipulated interest is evinced by its subsequent
rulings, cited above, in all of which the main obligation was upheld and the
offending interest rate merely corrected. Hence, it is clear and settled that the
principal loan obligation still stands and remains valid. By the same token, since the
mortgage contract derives its vitality from the validity of the principal obligation,
the invalid stipulation on interest rate is similarly insufficient to render void the
ancillary mortgage contract.

It should be noted that had the Court declared the loan and mortgage agreements
void for being contrary to public policy, no prescriptive period could have
run. [20] Such benefit is obviously not available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article 1391 of the Civil Code, which governs voidable contracts.
This conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the
rule in this case. We are hard put to conclude in this case that there was any undue
influence in the first place.

There is ultimately no showing that petitioners' consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners
may have motivated them to contract with respondents, but undue influence
cannot be attributed to respondents simply because they had lent money. Article
1391, in relation to Article 1390 of the Civil Code, grants the aggrieved party the
right to obtain the annulment of contract on account of factors which vitiate
consent. Article 1337 defines the concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of

his power over the will of another, depriving the latter of a reasonable
freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties or
the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial
distress.

While petitioners were allegedly financially distressed, it must be proven that there
is deprivation of their free agency. In other words, for undue influence to be
present, the influence exerted must have so overpowered or subjugated the mind
of a contracting party as to destroy his free agency, making him express the will of
another rather than his own. [21] The alleged lingering financial woes of
petitioners per se cannot be equated with the presence of undue influence.

The RTC had likewise concluded that petitioners were barred by laches from
assailing the validity of the real estate mortgage. We wholeheartedly agree. If
indeed petitioners unwillingly gave their consent to the agreement, they should
have raised this issue as early as in the foreclosure proceedings. It was only when
the writ of possession was issued did petitioners challenge the stipulations in the
loan contract in their action for annulment of mortgage. Evidently, petitioners slept
on their rights. The Court of Appeals succinctly made the following observations:

In all these proceedings starting from the foreclosure, followed by the

issuance of a provisional certificate of sale; then the definite certificate
of sale; then the issuance of TCT No. 29338 in favor of the defendants
and finally the petition for the issuance of the writ of possession in
 favor of the defendants, there is no showing that plaintiffs questioned
the validity of these proceedings. It was only after the issuance of the
writ of possession in favor of the defendants, that plaintiffs allegedly
tendered to the defendants the amount of P260,000.00 which the
defendants refused. In all these proceedings, why did plaintiffs sleep on
their rights? [22]

Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract,
their action would already be barred by prescription when they filed it. Moreover,
petitioners had clearly slept on their rights as they failed to timely assail the validity
of the mortgage agreement. The denial of the petition in G.R. No. 150773 is
warranted.

We now resolve the petition in G.R. No. 153599.

Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January
2000 could no longer be questioned in a special civil action for certiorari and
mandamus as the reglementary period for such action had already elapsed.

It must be noted that the Order  dated 3 August 1999 suspending the enforcement
of the writ of possession had a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty
(20)-day period, the said Order became functus officio. Thus, there is really no
sense in assailing the validity of this Order, mooted as it was. For the same reason,
the validity of the order need not have been assailed by respondents in their special
civil action before the Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of

injunction whose period of efficacy is indefinite. It may be properly assailed by way
of the special civil action for certiorari, as it is interlocutory in nature.

As a rule, the special civil action for certiorari under Rule 65 must be filed not later
than sixty (60) days from notice of the judgment or order. [23] Petitioners argue
that the 3 August 1999 Order could no longer be assailed by respondents in a
special civil action for certiorari before the Court of Appeals, as the petition was
filed beyond sixty (60) days following respondents' receipt of the Order.
Considering that the 3 August 1999 Order had become functus officio in the first
place, this argument deserves scant consideration.

Petitioners further claim that the 6 January 2000 Order  could not have likewise
been the subject of a special civil action for certiorari, as it is according to them a
final order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its
effects would only be provisional in character and would still leave substantial
proceedings to be further had by the issuing court in order to put the controversy to
rest. [24] The injunctive relief granted by the order is definitely final, but merely
provisional, its effectivity hinging on the ultimate outcome of the then pending
action for annulment of real estate mortgage. Indeed, an interlocutory order hardly
puts to a close, or disposes of, a case or a disputed issue leaving nothing else to be
done by the court in respect thereto, as is characteristic of a final order.

Since the 6 January 2000 Order  is not a final order, but rather interlocutory in
nature, we cannot agree with petitioners who insist that it may be assailed only
through an appeal perfected within fifteen (15) days from receipt thereof by
respondents. It is axiomatic that an interlocutory order cannot be challenged by an
appeal,

but is susceptible to review only through the special civil action of certiorari. [25] 
The sixty (60)-day reglementary period for special civil actions under Rule 65
applies, and respondents' petition was filed with the Court of Appeals well within
the period.

Accordingly, no error can be attributed to the Court of Appeals in granting the

petition for certiorari and mandamus. As pointed out by respondents, the remedy of
mandamus lies to compel the performance of a ministerial duty. The issuance of a
writ of possession to a purchaser in an extrajudicial foreclosure is merely a
ministerial function. [26]

Thus, we also affirm the Court of Appeals' ruling to set aside the RTC orders
enjoining the enforcement of the writ of possession. [27] The purchaser in a
foreclosure sale is entitled as a matter of right to a writ of possession, regardless of
whether or not there is a pending suit for annulment of the mortgage or the
foreclosure proceedings. An injunction to prohibit the issuance or enforcement of
the writ is entirely out of place. [28]

One final note. The issue on the validity of the stipulated interest rates, regrettably
for petitioners, was not raised at the earliest possible opportunity. It should be
pointed out though that since an excessive stipulated interest rate may be void for
being contrary to public policy, an action to annul said interest rate does not
prescribe. Such indeed is the remedy; it is not the action for annulment of the
ancillary real estate mortgage. Despite the nullity of the stipulated interest rate, the
principal loan obligation subsists, and along with it the mortgage that serves as
collateral security for it.

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.

SO ORDERED.
G.R. No. 179334               July 1, 2013

SECRETARY OF THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS and DISTRICT

ENGINEER CELESTINO R. CONTRERAS, Petitioners,
vs.
SPOUSES HERACLEO and RAMONA TECSON, Respondents.

DECISION

PERALTA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Court of
Appeals (CA) Decision1 dated July 31, 2007 in CA-G.R. CV No. 77997. The assailed decision
affirmed with modification the Regional Trial Court (RTC)2 Decision3 dated March 22, 2002 in Civil
Case No. 208-M-95.

The case stemmed from the following factual and procedural antecedents:

Respondent spouses Heracleo and Ramona Tecson (respondents) are co-owners of a parcel of land
with an area of 7,268 square meters located in San Pablo, Malolos, Bulacan and covered by
Transfer Certificate of Title (TCT) No. T-430064 of the Register of Deeds of Bulacan. Said parcel of
land was among the properties taken by the government sometime in 1940 without the owners’
consent and without the necessary expropriation proceedings and used for the construction of the
MacArthur Highway.5

In a letter6 dated December 15, 1994, respondents demanded the payment of the fair market value
of the subject parcel of land. Petitioner Celestino R. Contreras (petitioner Contreras), then District
Engineer of the First Bulacan Engineering District of petitioner Department of Public Works and
Highways (DPWH), offered to pay the subject land at the rate of ₱0.70 per square meter per
Resolution of the Provincial Appraisal Committee (PAC) of Bulacan.7 Unsatisfied with the offer,
respondents demanded for the return of their property or the payment of compensation at the current
fair market value.8

As their demand remained unheeded, respondents filed a Complaint9 for recovery of possession with
damages against petitioners, praying that they be restored to the possession of the subject parcel of
land and that they be paid attorney’s fees.10 Respondents claimed that the subject parcel of land was
assessed at ₱2,543,800.00.11

Instead of filing their Answer, petitioners moved for the dismissal of the complaint on the following
grounds: (1) that the suit is against the State which may not be sued without its consent; (2) that the
case has already prescribed; (3) that respondents have no cause of action for failure to exhaust
administrative remedies; and (4) if respondents are entitled to compensation, they should be paid
only the value of the property in 1940 or 1941.12

On June 28, 1995, the RTC issued an Order13 granting respondents’ motion to dismiss based on the
doctrine of state immunity from suit. As respondents’ claim includes the recovery of damages, there
is no doubt that the suit is against the State for which prior waiver of immunity is required. When
elevated to the CA,14 the appellate court did not agree with the RTC and found instead that the
doctrine of state immunity from suit is not applicable, because the recovery of compensation is the
only relief available to the landowner. To deny such relief would undeniably cause injustice to the
landowner. Besides, petitioner Contreras, in fact, had earlier offered the payment of compensation
although at a lower rate.Thus, the CA reversed and set aside the dismissal of the complaint and,
consequently, remanded the case to the trial court for the purpose of determining the just
compensation to which respondents are entitled to recover from the government.15 With the finality of
the aforesaid decision, trial proceeded in the RTC.

The Branch Clerk of Court was initially appointed as the Commissioner and designated as the
Chairman of the Committee that would determine just compensation,16 but the case was later
referred to the PAC for the submission of a recommendation report on the value of the subject
property.17 In PAC Resolution No. 99-007,18 the PAC recommended the amount of ₱1,500.00 per
square meter as the just compensation for the subject property.

On March 22, 2002, the RTC rendered a Decision,19 the dispositive portion of which reads:

WHEREFORE, premises considered, the Department of Public Works and Highways or its duly
assigned agencies are hereby directed to pay said Complainants/Appellants the amount of One
Thousand Five Hundred Pesos (₱1,500.00) per square meter for the lot subject matter of this case
in accordance with the Resolution of the Provincial Appraisal Committee dated December 19, 2001.

SO ORDERED.20

On appeal, the CA affirmed the above decision with the modification that the just compensation
stated above should earn interest of six percent (6%) per annum computed from the filing of the
action on March 17, 1995 until full payment.21

In its appeal before the CA, petitioners raised the issues of prescription and laches, which the CA
brushed aside on two grounds: first, that the issue had already been raised by petitioners when the
case was elevated before the CA in CA-G.R. CV No. 51454. Although it was not squarely ruled upon
by the appellate court as it did not find any reason to delve further on such issues, petitioners did not
assail said decision barring them now from raising exactly the same issues; and second, the issues
proper for resolution had been laid down in the pre-trial order which did not include the issues of
prescription and laches. Thus, the same can no longer be further considered. As to the propriety of
the property’s valuation as determined by the PAC and adopted by the RTC, while recognizing the
rule that the just compensation should be the reasonable value at the time of taking which is 1940,
the CA found it necessary to deviate from the general rule. It opined that it would be obviously unjust
and inequitable if respondents would be compensated based on the value of the property in 1940
which is ₱0.70 per sq m, but the compensation would be paid only today. Thus, the appellate court
found it just to award compensation based on the value of the property at the time of payment. It,
therefore, adopted the RTC’s determination of just compensation of ₱1,500.00 per sq m as
recommended by the PAC. The CA further ordered the payment of interest at the rate of six percent
(6%) per annum reckoned from the time of taking, which is the filing of the complaint on March 17,
1995.

Aggrieved, petitioners come before the Court assailing the CA decision based on the following
grounds:

I.

THE COURT OF APPEALS GRAVELY ERRED IN GRANTING JUST COMPENSATION TO

RESPONDENTS CONSIDERING THE HIGHLY DUBIOUS AND QUESTIONABLE
CIRCUMSTANCES OF THEIR ALLEGED OWNERSHIP OF THE SUBJECT PROPERTY.

II.

THE COURT OF APPEALS GRAVELY ERRED IN AWARDING JUST COMPENSATION TO

RESPONDENTS BECAUSE THEIR COMPLAINT FOR RECOVERY OF POSSESSION AND
DAMAGES IS ALREADY BARRED BY PRESCRIPTION AND LACHES.

III.

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE TRIAL COURT’S DECISION
ORDERING THE PAYMENT OF JUST COMPENSATION BASED ON THE CURRENT MARKET
VALUE OF THE ALLEGED PROPERTY OF RESPONDENTS.22

Petitioners insist that the action is barred by prescription having been filed fifty-four (54) years after
the accrual of the action in 1940. They explain that the court can motu proprio dismiss the complaint
if it shows on its face that the action had already prescribed. Petitioners likewise aver that
respondents slept on their rights for more than fifty years; hence, they are guilty of laches. Lastly,
petitioners claim that the just compensation should be based on the value of the property at the time
of taking in 1940 and not at the time of payment.23

The petition is partly meritorious.

The instant case stemmed from an action for recovery of possession with damages filed by
respondents against petitioners. It, however, revolves around the taking of the subject lot by
petitioners for the construction of the MacArthur Highway. There is taking when the expropriator
enters private property not only for a momentary period but for a permanent duration, or for the
purpose of devoting the property to public use in such a manner as to oust the owner and deprive
him of all beneficial enjoyment thereof.24
It is undisputed that the subject property was taken by petitioners without the benefit of expropriation
proceedings for the construction of the MacArthur Highway. After the lapse of more than fifty years,
the property owners sought recovery of the possession of their property. Is the action barred by
prescription or laches? If not, are the property owners entitled to recover possession or just
compensation?

As aptly noted by the CA, the issues of prescription and laches are not proper issues for resolution
as they were not included in the pre-trial order. We quote with approval the CA’s ratiocination in this
wise:

Procedurally, too, prescription and laches are no longer proper issues in this appeal. In the pre-trial
order issued on May 17, 2001, the RTC summarized the issues raised by the defendants, to wit: (a)
whether or not the plaintiffs were entitled to just compensation; (b) whether or not the valuation
would be based on the corresponding value at the time of the taking or at the time of the filing of the
action; and (c) whether or not the plaintiffs were entitled to damages. Nowhere did the pre-trial order
indicate that prescription and laches were to be considered in the adjudication of the RTC.25

To be sure, the pre-trial order explicitly defines and limits the issues to be tried and controls the
subsequent course of the action unless modified before trial to prevent manifest injustice.26

Even if we squarely deal with the issues of laches and prescription, the same must still fail. Laches is
principally a doctrine of equity which is applied to avoid recognizing a right when to do so would
result in a clearly inequitable situation or in an injustice.27 This doctrine finds no application in this
case, since there is nothing inequitable in giving due course to respondents’ claim. Both equity and
the law direct that a property owner should be compensated if his property is taken for public
use.28 Neither shall prescription bar respondents’ claim following the long-standing rule "that where
private property is taken by the Government for public use without first acquiring title thereto either
through expropriation or negotiated sale, the owner’s action to recover the land or the value thereof
does not prescribe."29

When a property is taken by the government for public use, jurisprudence clearly provides for the
remedies available to a landowner. The owner may recover his property if its return is feasible or, if it
is not, the aggrieved owner may demand payment of just compensation for the land taken.30 For
failure of respondents to question the lack of expropriation proceedings for a long period of time,
they are deemed to have waived and are estopped from assailing the power of the government to
expropriate or the public use for which the power was exercised. What is left to respondents is the
right of compensation.31 The trial and appellate courts found that respondents are entitled to
compensation. The only issue left for determination is the propriety of the amount awarded to
respondents.

Just compensation is "the fair value of the property as between one who receives, and one who
desires to sell, x x x fixed at the time of the actual taking by the government." This rule holds true
when the property is taken before the filing of an expropriation suit, and even if it is the property
owner who brings the action for compensation.32

The issue in this case is not novel.

In Forfom Development Corporation [Forfom] v. Philippine National Railways [PNR],33 PNR entered

the property of Forfom in January 1973 for public use, that is, for railroad tracks, facilities and
appurtenances for use of the Carmona Commuter Service without initiating expropriation
proceedings.34 In 1990, Forfom filed a complaint for recovery of possession of real property and/or
damages against PNR. In Eusebio v. Luis,35 respondent’s parcel of land was taken in 1980 by the
City of Pasig and used as a municipal road now known as A. Sandoval Avenue in Pasig City without
the appropriate expropriation proceedings. In 1994, respondent demanded payment of the value of
the property, but they could not agree on its valuation prompting respondent to file a complaint for
reconveyance and/or damages against the city government and the mayor. In Manila International
Airport Authority v. Rodriguez,36 in the early 1970s, petitioner implemented expansion programs for
its runway necessitating the acquisition and occupation of some of the properties surrounding its
premises. As to respondent’s property, no expropriation proceedings were initiated.  In 1997,
1âwphi1

respondent demanded the payment of the value of the property, but the demand remained
unheeded prompting him to institute a case for accion reivindicatoria with damages against
petitioner. In Republic v. Sarabia,37 sometime in 1956, the Air Transportation Office (ATO) took
possession and control of a portion of a lot situated in Aklan, registered in the name of respondent,
without initiating expropriation proceedings. Several structures were erected thereon including the
control tower, the Kalibo crash fire rescue station, the Kalibo airport terminal and the headquarters of
the PNP Aviation Security Group. In 1995, several stores and restaurants were constructed on the
remaining portion of the lot. In 1997, respondent filed a complaint for recovery of possession with
damages against the storeowners where ATO intervened claiming that the storeowners were its
lessees.

The Court in the above-mentioned cases was confronted with common factual circumstances where
the government took control and possession of the subject properties for public use without initiating
expropriation proceedings and without payment of just compensation, while the landowners failed for
a long period of time to question such government act and later instituted actions for recovery of
possession with damages. The Court thus determined the landowners’ right to the payment of just
compensation and, more importantly, the amount of just compensation. The Court has uniformly
ruled that just compensation is the value of the property at the time of taking that is controlling for
purposes of compensation. In Forfom, the payment of just compensation was reckoned from the
time of taking in 1973; in Eusebio, the Court fixed the just compensation by determining the value of
the property at the time of taking in 1980; in MIAA, the value of the lot at the time of taking in 1972
served as basis for the award of compensation to the owner; and in Republic, the Court was
convinced that the taking occurred in 1956 and was thus the basis in fixing just compensation. As in
said cases, just compensation due respondents in this case should, therefore, be fixed not as of the
time of payment but at the time of taking, that is, in 1940.

The reason for the rule has been clearly explained in Republic v. Lara, et al.,38 and repeatedly held
by the Court in recent cases, thus:

x x x "The value of the property should be fixed as of the date when it was taken and not the date of
the filing of the proceedings." For where property is taken ahead of the filing of the condemnation
proceedings, the value thereof may be enhanced by the public purpose for which it is taken; the
entry by the plaintiff upon the property may have depreciated its value thereby; or, there may have
been a natural increase in the value of the property from the time it is taken to the time the complaint
is filed, due to general economic conditions. The owner of private property should be compensated
only for what he actually loses; it is not intended that his compensation shall extend beyond his loss
or injury. And what he loses is only the actual value of his property at the time it is taken x x x.39

Both the RTC and the CA recognized that the fair market value of the subject property in 1940 was
₱0.70/sq m.40 Hence, it should, therefore, be used in determining the amount due respondents
instead of the higher value which is ₱1,500.00. While disparity in the above amounts is obvious and
may appear inequitable to respondents as they would be receiving such outdated valuation after a
very long period, it is equally true that they too are remiss in guarding against the cruel effects of
belated claim. The concept of just compensation does not imply fairness to the property owner
alone. Compensation must be just not only to the property owner, but also to the public which
ultimately bears the cost of expropriation.41

Clearly, petitioners had been occupying the subject property for more than fifty years without the
benefit of expropriation proceedings. In taking respondents’ property without the benefit of
expropriation proceedings and without payment of just compensation, petitioners clearly acted in
utter disregard of respondents’ proprietary rights which cannot be countenanced by the Court.42 For
said illegal taking, respondents are entitled to adequate compensation in the form of actual or
compensatory damages which in this case should be the legal interest of six percent (6%) per
annum on the value of the land at the time of taking in 1940 until full payment.43 This is based on the
principle that interest runs as a matter of law and follows from the right of the landowner to be placed
in as good position as money can accomplish, as of the date of taking.44

WHEREFORE, premises considered, the pet1t10n is PARTIALLY GRANTED. The Court of Appeals
Decision dated July 31, 2007 in CAG.R. CV No. 77997 is MODIFIED, in that the valuation of the
subject property owned by respondents shall be F0.70 instead of ₱1,500.00 per square meter, with
interest at six percent ( 6o/o) per annum from the date of taking in 1940 instead of March 17, 1995,
until full payment.

SO ORDERED.

G.R. No. 201892, July 22, 2015

NORLINDA S. MARILAG, Petitioner, v. MARCELINO B. MARTINEZ, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated November 4,

2011 and the Resolution3 dated May 14, 2012 of the Court of Appeals (CA) in CA-G.R.
CV No. 81258 which recalled and set aside the Orders dated November 3, 2003 4 and
January 14, 20045 of the Regional Trial Court (RTC) of Las Piñas City, Branch 202
(court a quo) in Civil Case No. 98-0156, and reinstated the Decision 6 dated August 28,
2003 directing petitioner Norlinda S. Marilag (petitioner) to return to respondent
Marcelino B. Martinez (respondent) the latter's excess payment, plus interest, and to
pay attorney's fees and the costs of suit.

The Facts

On July 30, 1992, Rafael Martinez (Rafael), respondent's father, obtained from
petitioner a loan in the amount of P160,000.00, with a stipulated monthly interest of
five percent (5%), payable within a period of six (6) months. The loan was secured by a
real estate mortgage over a parcel of land covered by Transfer Certificate of Title (TCT)
No. T-208400. Rafael failed to settle his obligation upon maturity and despite repeated
demands, prompting petitioner to file a Complaint for Judicial Foreclosure of Real Estate
Mortgage before the RTC of Imus, Cavite, Branch 90 7 (RTC-Imus) on November 10,
1995,8 docketed as Civil Case No. 1208-95 Gudicial foreclosure case).

Rafael failed to file his answer and, upon petitioner's motion, was declared in default.
After an ex parte presentation of petitioner's evidence, the RTC-Imus issued a
Decision9 dated January 30, 1998, (January 30, 1998 Decision) in the foreclosure case,
declaring the stipulated 5% monthly interest to be usurious and reducing the same to
12% per annum (p.a.). Accordingly, it ordered Rafael to pay petitioner the amount of
P229,200.00, consisting of the principal of P160,000.00 and accrued interest of
P59,200.00 from July 30, 1992 to September 30, 1995. 10 Records do not show that this
Decision had already attained finality.

Meanwhile, prior to Rafael's notice of the above decision, respondent agreed to pay
Rafael's obligation to petitioner which was pegged at P689,000.00. After making a total
payment of P400,000.00,11 he executed a promissory note12 dated February 20, 1998
(subject PN), binding himself to pay on or before March 31, 1998 the amount of
P289,000.00, "representing the balance of the agreed financial obligation of [his] father
to [petitioner]."13 After learning of the January 30, 1998 Decision, respondent refused
to pay the amount covered by the subject PN despite demands, prompting petitioner to
file a complaint14 for sum of money and damages before the court a quo on July 2,
1998, docketed as Civil Case No. 98-0156 (collection case).

Respondent filed his answer,15 contending that petitioner has no cause of action against
him. He averred that he has fully settled Rafael's obligation and that he committed a
mistake in paying more than the amount due under the loan, i.e., the amount of
P229,200.00 as adjudged by the RTC-Imus in the judicial foreclosure case which, thus,
warranted the return of the excess payment. He therefore prayed for the dismissal of
the complaint, and interposed a compulsory counterclaim for the release of the
mortgage, the return of the excess payment, and the payment of moral and exemplary
damages, attorney's fees and litigation expenses.16 redarclaw

The Court A Quo's Ruling

In a Decision17 dated August 28, 2003 (August 28, 2003 Decision), the court a
quo denied recovery on the subject PN. It found that the consideration for its execution
was Rafael's indebtedness to petitioner, the extinguishment of which necessarily results
in the consequent extinguishment of the cause therefor. Considering that the RTC-Imus
had adjudged Rafael liable to petitioner only for the amount of P229,200.00, for which
a total of P400,000.00 had already been paid, the court a quo found no valid or
compelling reason to allow petitioner to recover further on the subject PN. There being
an excess payment of P171,000.00, it declared that a quasi-contract (in the concept
of solutio indebiti) exists between the parties and, accordingly, directed petitioner to
return the said amount to respondent, plus 6% interest p.a. 18 reckoned from the date of
judicial demand19 on August 6, 1998 until fully paid, and to pay attorney's fees and the
costs of suit.20
redarclaw

In an Order21 dated November 3, 2003 (November 3, 2003 Order), however, the

court a quo granted petitioner's motion for reconsideration, and recalled and set aside
its August 28, 2003 Decision. It declared that the causes of action in the collection and
foreclosure cases are distinct, and respondent's failure to comply with his obligation
under the subject PN justifies petitioner to seek judicial relief. It further opined that the
stipulated 5% monthly interest is no longer usurious and is binding on respondent
considering the suspension of the Usury Law pursuant to Central Bank Circular 905,
series of 1982. Accordingly, it directed respondent to pay the amount of P289,000.00
due under the subject PN, plus interest at the legal rate reckoned from the last extra-
judicial demand on May 15, 1998, until fully paid, as well as attorney's fees and the
costs of suit.22
redarclaw

Aggrieved, respondent filed a motion for reconsideration 23 which was denied in an

Order24 dated January 14, 2004, prompting him to elevate the matter to the CA. 25 redarclaw

The CA Ruling

In a Decision26 dated November 4, 2011, the CA recalled and set aside the court a quo's
November 3, 2003 and January 14, 2004 Orders, and reinstated the August 28, 2003
Decision. It held that the doctrine of res judicata finds application in the instant
case,27 considering that both the judicial foreclosure and collection cases were filed as a
consequence of the non-payment ofRafael's loan, which was the principal obligation
secured by the real estate mortgage and the primary consideration for the execution of
the subject PN. Since res judicata only requires substantial, not actual, identity of
causes of action and/or identity of issue,28 it ruled that the judgment in the judicial
foreclosure case relating to Rafael's obligation to petitioner is final and conclusive on
the collection case.

Petitioner's motion for reconsideration was denied in a Resolution 29 dated May 14,
2012; hence, this petition.

The Issue Before the Court

The essential issue for the Court's resolution is whether or not the CA committed
reversible error in upholding the dismissal of the collection case.

The Court's Ruling

The petition lacks merit.

A case is barred by prior judgment or res judicata when the following elements concur:
(a) the judgment sought to bar the new action must be final; (b) the decision must
have been rendered by a court having jurisdiction over the subject matter and the
parties; (c) the disposition of the case must be a judgment on the merits; and (d) there
must be as between the first and second action, identity of parties, subject matter, and
causes of action.30 redarclaw

After a punctilious review of the records, the Court finds the principle of res judicata to
be inapplicable to the present case. This is because the records are bereft of any
indication that the August 28, 2003 Decision in the judicial foreclosure case had already
attained finality, evidenced, for instance, by a copy of the entry of judgment in the said
case. Accordingly, with the very first element of res judicata missing, said principle
cannot be made to obtain.
This notwithstanding, the Court holds that petitioner's prosecution of the collection case
was barred, instead, by the principle of litis pendentia in view of the substantial identity
of parties and singularity of the causes of action in the foreclosure and collection cases,
such that the prior foreclosure case barred petitioner's recourse to the subsequent
collection case.

To lay down the basics, litis pendentia, as a ground for the dismissal of a civil
action, refers to that situation wherein another action is pending between the
same parties for the same cause of action, such that the second action
becomes unnecessary and vexatious. For the bar of litis pendentia to be invoked,
the following requisites must concur: (a) identity of parties, or at least such parties as
represent the same interests in both actions; (b) identity of rights asserted and relief
prayed for, the relief being founded on the same facts; and (c) the identity of the two
preceding particulars is such that any judgment rendered in the pending case,
regardless of which party is successful would amount to res judicata in the other.31 The
underlying principle of litis pendentia is the theory that a party is not allowed to vex
another more than once regarding the same subject matter and for the same cause of
action. This theory is founded on the public policy that the same subject matter should
not be the subject of controversy in courts more than once, in order that possible
conflicting judgments may be avoided for the sake of the stability of the rights and
status of persons, and also to avoid the costs and expenses incident to numerous
suits.32 Consequently, a party will not be permitted to split up a single cause of action
and make it a basis for several suits as the whole cause must be determined in one
action.33To be sure, splitting a cause of action is a mode of forum shopping by
filing multiple cases based on the same cause of action, but with different
prayers, where the round of dismissal is litis pendentia for res judicata, as the
case may be).34 redarclaw

In this relation, it must be noted that the question of whether a cause of action is single
and entire or separate is not always easy to determine and the same must often be
resolved, not by the general rules, but by reference to the facts and circumstances of
the particular case. The true rule, therefore, is whether the entire amount arises
from one and the same act or contract which must, thus, be sued for in one
action, or the several parts arise from distinct and different acts or contracts,
for which a party may maintain separate suits.35 redarclaw

In loan contracts secured by a real estate mortgage, the rule is that the creditor-
mortgagee has a single cause of action against the debtor mortgagor, i.e., to
recover the debt, through the filing of a personal action for collection of sum of
money or the institution of a real action to foreclose on the mortgage security.
The two remedies are alternative,36 not cumulative or successive,37 and each remedy
is complete by itself. Thus, if the creditor-mortgagee opts to foreclose the real estate
mortgage, he waives the action for the collection of the unpaid debt, 38except only for
the recovery of whatever deficiency may remain in the outstanding obligation of the
debtor-mortgagor after deducting the bid price in the public auction sale of the
mortgaged properties.39 Accordingly, a deficiency judgment shall only issue after it is
established that the mortgaged property was sold at public auction for an amount less
than the outstanding obligation.

In the present case, records show that petitioner, as creditor mortgagee, instituted an
action for judicial foreclosure pursuant to the provisions of Rule 68 of the Rules of
Court in order to recover on Rafael's debt. In light of the foregoing discussion, the
availment of such remedy thus bars recourse to the subsequent filing of a personal
action for collection of the same debt, in this case, under the principle of litis
pendentia, considering that the foreclosure case only remains pending as it was not
shown to have attained finality.

While the ensuing collection case was anchored on the promissory note executed by
respondent who was not the original debtor, the same does not constitute a separate
and distinct contract of loan which would have given rise to a separate cause of action
upon breach. Notably, records are bereft of any indication that respondent's agreement
to pay Rafael's loan obligation and the execution of the subject PN extinguished by
novation40 the contract of loan between Rafael and petitioner, in the absence of express
agreement or any act of equal import. Well-settled is the rule that novation is never
presumed, but must be clearly and unequivocally shown. Thus, in order for a new
agreement to supersede the old one, the parties to a contract must expressly agree
that they are abrogating their old contract in favor of a new one, 41 which was not shown
here.

On the contrary, it is significant to point out that: (a) the consideration for the subject
PN was the same consideration that supported the original loan obligation of Rafael; (b)
respondent merely assumed to pay Rafael's remaining unpaid balance in the latter's
behalf, i.e., as Rafael's agent or representative;42 and (c) the subject PN was executed
after respondent had assumed to pay Rafael's obligation and made several payments
thereon. Case law states that the fact that the creditor accepts payments from a third
person, who has assumed the obligation, will result merely in the addition of debtors,
not novation, and the creditor may enforce the obligation against both debtors. 43 For
ready reference, the subject PN reads in full:   
ChanRoblesVirtualawlibrary

February 20, 1998

PROMISSORY NOTE

P289,000.00

I, MARCELINO B. MARTINEZ, son of Mr. RAFAEL MARTINEZ, of legal age, Filipino,

married and a resident of No. 091 Anabu I-A, Imus, Cavite, by these presents do
hereby specifically and categorically PROMISE, UNDERTAKE and bind myself in behalf
of my father, to pay to Miss NORLINDA S. MARILAG, Mortgagee-Creditor of my said
father, the sum of TWO HUNDRED EIGHTY NINE THOUSAND PESOS (P289,000.00),
Philippine Currency, on or before MARCH 31, 1998, representing the balance of the
agreed financial obligation of my said father to her. (Emphases supplied)

Executed at Pamplona I, Las Piñas City, Metro Manila, this 20 th day of February, 1998.

Sgd.
MARCELINO B. MARTINEZ
Promissor44
Petitioner's contention that the judicial foreclosure and collection cases enforce
independent rights45 must, therefore, fail because the Deed of Real Estate
Mortgage46 and the subject PN both refer to one and the same obligation, i.e., Rafael's
loan obligation. As such, there exists only one cause of action for a single breach of
that obligation. Petitioner cannot split her cause of action on Rafael's unpaid loan
obligation by filing a petition for the judicial foreclosure of the real estate mortgage
covering the said loan, and, thereafter, a personal action for the collection of the unpaid
balance of said obligation not comprising a deficiency arising from foreclosure, without
violating the proscription against splitting a single cause of action, where the ground for
dismissal is either res judicata or litis pendentia, as in this case.

As elucidated by this Court in the landmark case of Bachrach Motor Co., Inc. v.
Icarangal.47
ChanRoblesVirtualawlibrary

For non-payment of a note secured by mortgage, the creditor has a single

cause of action against the debtor. This single cause of action consists in the
recovery of the credit with execution of the security. In other words, the creditor in his
action may make two demands, the payment of the debt and the foreclosure of his
mortgage. But both demands arise from the same cause, the non-payment of the debt,
and, for that reason, they constitute a single cause of action. Though the debt and
the mortgage constitute separate agreements, the latter is subsidiary to the
former, and both refer to one and the same obligation. Consequently, there
exists only one cause of action for a single breach of that obligation. Plaintiff,
then, by applying the rule above stated, cannot split up his single cause of
action by filing a complaint for payment of the debt, and thereafter another
complaint for foreclosure of the mortgage. If he does so, the filing of the first
complaint will bar the subsequent complaint. By allowing the creditor to file two
separate complaints simultaneously or successively, one to recover his credit and
another to foreclose his mortgage, we will, in effect, be authorizing him plural redress
for a single breach of contract at so much cost to the courts and with so much vexation
and oppression to the debtor. (Emphases and underscoring supplied)
Further on the point, the fact that no foreclosure sale appears to have been conducted
is of no moment because the remedy of foreclosure of mortgage is deemed chosen
upon the filing of the complaint therefor.48 In Suico Rattan & Buri Interiors, Inc. v.
CA,49 it was explained:
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x x x x In sustaining the rule that prohibits mortgage creditors from pursuing both the
remedies of a personal action for debt or a real action to foreclose the mortgage, the
Court held in the case of Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a
rule which would authorize the plaintiff to bring a personal action against the debtor
and simultaneously or successively another action against the mortgaged property,
would result not only in multiplicity of suits so offensive to justice and obnoxious to law
and equity, but also in subjecting the defendant to the vexation of being sued in the
place of his residence or of the residence of the plaintiff, and then again in the place
where the property lies. Hence, a remedy is deemed chosen upon the filing of the
suit for collection or upon the filing of the complaint in an action for
foreclosure of mortgage, pursuant to the provisions of Rule 68 of the Rules of
Court. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage
creditor upon filing of the petition not with any court of justice but with the office of the
sheriff of the province where the sale is to be made, in accordance with the provisions
of Act No. 3135, as amended by Act No. 4118. (Emphases supplied)
As petitioner had already instituted judicial foreclosure proceedings over the
mortgaged property, she is now barred from availing herself of an ordinary
action for collection, regardless of whether or not the decision in the foreclosure case
had attained finality. In fine, the dismissal of the collection case is in order.
Considering, however, that respondent's claim for return of excess payment partakes of
the nature of a compulsory counterclaim and, thus, survives the dismissal of
petitioner's collection suit, the same should be resolved based on its own merits and
evidentiary support.50 redarclaw

Records show that other than the matter of interest, the principal loan obligation and
the payments made were not disputed by the parties. Nonetheless, the Court finds the
stipulated 5% monthly interest to be excessive and unconscionable. In a plethora of
cases, the Court has affirmed that stipulated interest rates of three percent (3%)
per month and higher are excessive, iniquitous, unconscionable, and
exorbitant,51hence, illegal52and void for being contrary to morals.53 In Agner v.
BPI Family Savings Bank, Inc.,54 the Court had the occasion to rule:
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Settled is the principle which this Court has affirmed in a number of cases that
stipulated interest rates of three percent (3%) per month and higher are excessive,
iniquitous, unconscionable, and exorbitant. While Central Bank Circular No. 905-82,
which took effect on January 1, 1983, effectively removed the ceiling on interest rates
for both secured and unsecured loans, regardless of maturity, nothing in the said
circular could possibly be read as granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets. Since the stipulation on the interest rate is void for
being contrary to morals, if not against the law, it is as if there was no express
contract on said interest rate; thus, the interest rate may be reduced as reason
and equity demand. (Emphases supplied)
As such, the stipulated 5% monthly interest should be equitably reduced to 1% per
month or 12% p.a. reckoned from the execution of the real estate mortgage on July 30,
1992. In order to determine whether there was any overpayment as claimed by
respondent, we first compute the interest until January 30, 1998 55 when he made a
payment in the amount of P300,000.00 on Rafael's loan obligation. Accordingly, the
amount due on the loan as of the latter date is hereby computed as follows:
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Principal P160,000.00 
Interest from
Add:07/30/1992 to  
01/30/1998
(P160,000.00 X
  105,600.00 
12% X 5.5 yrs.)
Amount due on the loan P265,600.00 
Less: Payment made on
( 300,000.00) 
01/30/98
Overpayment as of (P
 
01/30/98 34,400.00)56
Thus, as of January 30, 1998, only the amount of P265,600.00 was due under the loan
contract, and the receipt of an amount more than that renders petitioner liable for the
return of the excess. Respondent, however, made further payment in the amount of
P100,000.0057 on the belief that the subject loan obligation had not yet been satisfied.
Such payments were, therefore, clearly made by mistake, giving rise to the quasi-
contractual obligation of solutio indebiti under Article 215458 in relation to Article
216359 of the Civil Code. Not being a loan or forbearance of money, an interest of 6%
p.a. should be imposed on the amount to be refunded and on the damages and
attorney's fees awarded, if any, computed from the time of demand 60 until its
satisfaction.61 Consequently, petitioner must return to respondent the excess payments
in the total amount of P134,400.00, with legal interest at the rate of 6% p.a. from the
filing of the Answer on August 6, 199862 interposing a counterclaim for such
overpayment, until fully settled.

However, inasmuch as the court a quo failed to state in the body of its decision the
factual or legal basis for the award of attorney's fees to the respondent, as required
under Article 220863 of the New Civil Code, the Court resolves to delete the same. The
rule is well-settled that the trial court must clearly state the reasons for awarding
attorney's fees in the body of its decision, not merely in its dispositive portion, as the
appellate courts are precluded from supplementing the bases for such award. 64 redarclaw

Finally, in the absence of showing that the court a quo's award of the costs of suit in
favor of respondent was patently capricious,65 the Court finds no reason to disturb the
same.

WHEREFORE, the petition is DENIED. The Decision dated November 4, 2011 and the
Resolution dated May 14, 2012 of the Court of Appeals in CA-G.R. CV No. 81258
reinstating the court a quo's Decision dated August 28, 2003 in Civil Case No. 98-0156
are hereby AFFIRMED with the MODIFICATIONS: (a) directing petitioner Norlinda S.
Marilag to return to respondent Marcelino B. Martinez the latter's excess payments in
the total amount of P134,400.00, plus legal interest at the rate of 6% p.a. from the
filing of the Answer on August 6, 1998 until full satisfaction; and (b) deleting the award

G.R. No. 98382 May 17, 1993

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and EPIFANIO DE LA CRUZ, respondents.

Santiago, Jr., Vidad, Corpus & Associates for petitioner.

Pedro R. Lazo for spouses-intervenors.

Rosendo G. Tansinsin, Jr. for private respondent.

MELO, J.:

The notices of sale under Section 3 of Act No. 3135, as amended by Act No. 4118, on extra-judicial
foreclosure of real estate mortgage are required to be posted for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notices shall also be published once a week for at least
three consecutive weeks in a newspaper of general circulation in the municipality or city.

Respondent court, through Justice Filemon Mendoza with whom Justices Campos, Jr. and Aldecoa,
Jr. concurred, construed the publication of the notices on March 28, April 11 and l2, 1969 as a fatal
announcement and reversed the judgment appealed from by declaring void, inter alia, the auction
sale of the foreclosed pieces of realty, the final deed of sale, and the consolidation of ownership (p.
27, Rollo).

Hence, the petition at bar, premised on the following backdrop lifted from the text of the challenged
decision:

The facts of the case as related by the trial court are, as follows:

This is a verified complaint brought by the plaintiff for the

reconveyance to him (and resultant damages) of two (2) parcels of
land mortgaged by him to the defendant Philippine National Bank
(Manila), which the defendant allegedly unlawfully foreclosed. The
defendant then consolidated ownership unto itself, and subsequently
sold the parcels to third parties. The amended Answer of the
defendant states on the other hand that the extrajudicial foreclosure,
consolidation of ownership, and subsequent sale to the third parties
were all valid, the bank therefore counterclaims for damages and
other equitable remedies.

x x x           x x x          x x x

From the evidence and exhibits presented by both parties, the Court
is of the opinion that the following facts have been proved: Two lots,
located at Bunlo, Bocaue, Bulacan (the first covered by Torrens
Certificate No. 16743 and possessed of an area of approximately
3,109 square meters: the second covered by Torrens Certificate No.
5787, possessed of an area of around 610 square meters, and upon
which stood a residential-commercial building were mortgaged to the
defendant Philippine National Bank. The lots were under the common
names of the plaintiff (Epifanio dela Cruz), his brother (Delfin) and his
sister (Maria). The mortgage was made possible because of the grant
by the latter two to the former of a special power of attorney to
mortgage the lots to the defendant. The lots were mortgaged to
guarantee the following promissory notes:

(1) a promissory note for Pl2,000.00, dated September 2, 1958, and payable within
69 days (date of maturity — Nov. l0, 1958);

(2) a promissory note for P4,000.00, dated September 22, 1958, and payable within
49 days (date of maturity — Nov. 10, 1958);

(3) a promissory note for P4,000.00, dated June 30, 1.958  and payable within 120
1

days (date of maturity — Nov. 10, 1958) See also Annex C of the complaint itself).

[1 This date of June 30, 1958 is disputed by the plaintiff who claims that the correct
date is June 30, 1961, which is the date actually mentioned in the promissory note. It
is however difficult to believe the plaintiff's contention since if it were true and correct,
this would mean that nearly three (3) years elapsed between the second and the
third promissory note; that at the time the third note was executed, the first two had
not yet been paid by the plaintiff despite the fact that the first two were supposed to
be payable within 69 and 49 days respectively. This state of affairs would have
necessitated the renewal of said two promissory notes. No such renewal was proved,
nor was the renewal ever alleged. Finally, and this is very significant: the third
mentioned promissory note states that the maturity date is Nov. 10, 1958. Now then,
how could the loan have been contracted on June 30, 1961? It will be observed that
in the bank records, the third mentioned promissory note was really executed on
June 30, 1958 (See Exhs. 9 and 9-A). The Court is therefore inclined to believe that
the date "June 30, 1961" was a mere clerical error and hat the true and correct date
is June 1958. However, even assuming that the true and correct date is June 30,
1961, the fact still remains that the first two promissory notes had been guaranteed
by the mortgage of the two lots, and therefore, it was legal and proper to foreclose
on the lots for failure to pay said two promissory notes.

On September 6, 1961, Atty. Ramon de los Reyes of the bank (PNB) presented
under Act No. 3135 a foreclosure petition of the two mortgaged lots before the
Sheriff's Office at Malolos, Bulacan; accordingly, the two lots were sold or auctioned
off on October 20, 1961 with the defendant PNB as the highest bidder for
P28,908.46. On March 7, 1963, Sheriff Leopoldo Palad executed a Final Deed of
Sale, in response to a letter-request by the Manager of the PNB (Malolos Branch).
On January 15, 1963 a Certificate of Sale in favor of the defendant was executed by
Sheriff Palad. The final Deed of Sale was registered in the Bulacan Registry of
Property on March 19, 1963. Inasmuch as the plaintiff did not volunteer to buy back
from the PNB the two lots, the PNB sold on June 4, 1970 the same to spouses
Conrado de Vera and Marina de Vera in a "Deed of Conditional Sale". (Decision,
pp.3-5; Amended Record on Appeal, pp. 96-98).

After due consideration of the evidence, the CFI on January 22, 1978 rendered its
Decision, the dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, the instant complaint

against the defendant Philippine National Bank is hereby ordered
DISMISSED, with costs against the plaintiff. The Counterclaim
against the plaintiff is likewise DISMISSED, for the Court does not
believe that the complaint had been made in bad faith.

SO ORDERED. (Decision, p. B.; Amended Record on Appeal, p. 100)

Not satisfied with the judgment, plaintiff interposed the present appeal assigning as
errors the following:

I.

THE LOWER COURT ERRED IN HOLDING IN FOOTNOTE I OF ITS DECISION

THAT IT IS THEREFORE INCLINED TO BELIEVE THAT THE DATE "JUNE 30,
1962" WAS A MERE CLERICAL ERROR AND THAT THE TRUE AND CORRECT
DATE IS JUNE 30, 1958. IT ALSO ERRED IN HOLDING IN THE SAME
FOOTNOTE I THAT "HOWEVER, EVEN ASSUMING THAT THE TRUE AND
CORRECT DATE IS JUNE 30, 1961, THE FACT STILL REMAINS THAT THE
FIRST TWO PROMISSORY NOTES HAD BEEN GUARANTEED BY THE
MORTGAGE OF THE TWO LOTS, AND THEREFORE, IT WAS LEGAL AND
PROPER TO FORECLOSE ON THE LOTS FOR FAILURE TO PAY SAID TWO
PROMISSORY NOTES". (page 115, Amended Record on Appeal)

II.
 THE LOWER COURT ERRED IN NOT HOLDING THAT THE PETITION FOR
EXTRAJUDICIAL FORECLOSURE WAS PREMATURELY FILED AND IS A MERE
SCRAP OF PAPER BECAUSE IT MERELY FORECLOSED THE ORIGINAL AND
NOT THE AMENDED MORTGAGE.

III.

THE LOWER COURT ERRED IN HOLDING THAT "IT IS CLEAR THAT THE
AUCTION SALE WAS NOT PREMATURE". (page 117, Amended Record on Appeal)

IV.

THE LOWER COURT ERRED IN HOLDING THAT "SUFFICE IT TO STATE THAT

ACTUALLY THE POWER OF ATTORNEY GIVEN TO THE PNB WAS EMBODIED
IN THE REAL ESTATE MORTGAGE (EXB. 10) WHICH WAS REGISTERED IN THE
REGISTRY OF PROPERTY OF BULACAN AND WAS ANNOTATED ON THE TWO
TORRENS CERTIFICATES INVOLVED" (page 118, Amended Record on Appeal).

V.

THE LOWER COURT ERRED IN HOLDING THAT "THE NOTICES REQUIRED

UNDER SEC. 3 OF ACT NO. 3135 WERE ALL COMPLIED WITH" AND "THAT THE
DAILY RECORD . . . IS A NEWSPAPER OF GENERAL CIRCULATION (pages 117-
118, Amended Record on Appeal).

VI.

THE LOWER COURT ERRED IN NOT DECLARING THE CERTIFICATE OF SALE,

FINAL DEED OF SALE AND AFFIDAVIT OF CONSOLIDATION, NULL AND VOID.

VII.

THE LOWER COURT ERRED IN NOT ORDERING DEFENDANT TO RECONVEY

TO PLAINTIFF THE PARCELS OF LAND COVERED BY T.C.T. NOS. 40712 AND
40713 OF BULACAN (page 8, Amended Record on Appeal)

VIII.

THE LOWER COURT ERRED IN NOT ORDERING DEFENDANT TO PAY TO

PLAINTIFF REASONABLE AMOUNTS OF MORAL AND EXEMPLARY DAMAGES
AND ATTORNEY'S FEES (page 8. Amended Record on Appeal).

IX.

THE LOWER COURT ERRED IN DISMISSING THE INSTANT COMPLAINT

AGAINST THE PHILIPPINE NATIONAL BANK WITH COSTS AGAINST THE
PLAINTIFF. (page 118, Amended Record on Appeal)." (Brief for Plaintiff-Appellant,
pp. 1-4) (pp. 17-21, Rollo)

With reference to the pertinent issue at hand, respondent court opined:

 The Notices of Sale of appellant's foreclosed properties were published on March
228, April 11 and April 12, 1969 issues of the newspaper "Daily Record" (Amended
Record on Appeal, p. 108). The date March 28, 1969 falls on a Friday while the dates
April 11 and 12, 1969 are on a Friday and Saturday, respectively. Section 3 of Act
No. 3135 requires that the notice of auction sale shall be "published once a week for
at least three consecutive weeks". Evidently, defendant-appellee bank failed to comly
with this legal requirement. The Supreme Court has held that:

The rule is that statutory provisions governing publication of notice of

mortgage foreclosure sales must be strictly complied with, and that
even slight deviations therefrom will invalidate the notice and render
the sale at least voidable (Jalandoni vs. Ledesma, 64 Phil. l058. G.R.
No. 42589, August 1937 and October 29, 1937). Interpreting Sec.
457 of the Code of Civil Procedure (reproduced in Sec. 18(c) of Rule
39, Rules of Court and in Sec. 3 of Act No. 3135) in Campomanes
vs. Bartolome and German & Co. (38 Phil. 808, G.R. No. 1309,
October 18, 1918), this Court held that if a sheriff sells without notice
prescribed by the Code of Civil Procedure induced thereto by the
judgment creditor, and the purchaser at the sale is the judgment
creditor, the sale is absolutely void and no title passes. This is
regarded as the settled doctrine in this jurisdiction whatever the rule
may be elsewhere (Boria vs. Addison, 14 Phil. 895, G.R. No. 18010,
June 21, 1922).

. . . It has been held that failure to advertise a mortgage foreclosure

sale in compliance with statutory requirements constitutes a
jurisdictional defect invalidating the sale and that a substantial error
or omission in a notice of sale will render the notice insufticient and
vitiate the sale (59 C.J.S. 1314). (Tambunting vs. Court of Appeals, L-
48278, November 8, 1988; 167 SCRA 16, 23-24).

In view of the admission of defendant-appellee in its pleading showing that there was
no compliance of the notice prescribed in Section 3 of Act No. 3135, as amended by
Act 4118, with respect to the notice of sale of the foreclosed real properties in this
case, we have no choice but to declare the auction sale as absolutely void in view of
the fact that the highest bidder and purchaser in said auction sale was defendant-
appellee bank. Consequently, the Certificate of Sale, the Final Deed of Sale and
Affidavit of Consolidation are likewise of no legal efffect. (pp. 24-25, Rollo)

Before we focus our attention on the subject of whether or not there was valid compliance in regard
to the required publication, we shall briefly discuss the other observations of respondent court vis-a-
vis herein private respondent's ascriptions raised with the appellate court when his suit for
reconveyance was dismissed by the court of origin even as private respondent does not impugn the
remarks of respondent court along this line.

Although respondent court acknowledged that there was an ambiguity on the date of execution of
the third promissory note (June 30, 1961) and the date of maturity thereof (October 28, 1958), it was
nonetheless established that the bank introduced sufficient proof to show that the discrepancy was a
mere clerical error pursuant to Section 7, Rule l30 of the Rules of Court. Anent the second
disputation aired by private respondent, the appellate court observed that inasmuch as the original
as well as the subsequent mortgage were foreclosed only after private respondent's default, the
procedure pursued by herein petitioner in foreclosing the collaterals was thus appropriate albeit the
petition therefor contained only a copy of the original mortgage.

It was only on the aspect of publication of the notices of sale under Act No. 3135, as amended, and
attorney's fees where herein private respondent scored points which eliminated in the reversal of the
trial court's decision. Respondent court was of the impression that herein petitioner failed to comply
with the legal requirement and the sale effected thereafter must be adjudged invalid following the
ruling of this Court in Tambunting vs. Court of Appeals (167 SCRA 16 [1988]); p. 8, Decision, p.
24, Rollo). In view of petitioner's so-called indifference to the rules set forth under Act No. 3135, as
amended, respondent court expressly authorized private respondent to recover attorney's fees
because he was compelled to incur expenses to protect his interest.

Immediately upon the submission of a supplemental petition, the spouses Conrado and Marina De
Vera filed a petition in intervention claiming that the two parcels of land involved herein were sold to
them on June 4, 1970 by petitioner for which transfer certificates of title were issued in their favor (p.
40, Rollo). On the other hand, private respondent pressed the idea that the alleged intervenors have
no more interest in the disputed lots in view of the sale effected by them to Teresa Castillo, Aquilino
and Antonio dela Cruz in 1990 (pp. 105-106, Rollo).

On March 9, 1992, the Court resolved to give due course to the petition and required the parties to
submit their respective memoranda (p. 110, Rollo).

Now, in support of the theory on adherence to the conditions spelled in the preliminary portion of this
discourse, the pronouncement of this Court in Bonnevie vs. Court of Appeals (125 SCRA [1983]; p.
135, Rollo) is sought to be utilized to press the point that the notice need not be published for three
full weeks. According to petitioner, there is no breach of the proviso since after the first publication
on March 28, 1969, the second notice was published on April 11, 1969 (the last day of the second
week), while the third publication on April 12, 1969 was announced on the first day of the third week.
Petitioner thus concludes that there was no violation from the mere happenstance that the third
publication was made only a day after the second publication since it is enough that the second
publication be made on any day within the second week and the third publication, on any day within
the third week. Moreover, in its bid to rectify its admission in judicio, petitioner asseverates that said
admission alluded to refers only to the dates of publications, not that there was non-compliance with
the publication requirement.

Private respondent, on the other hand, views the legal question from a different perspective. He
believes that the period between each publication must never be less than seven consecutive days
(p. 4, Memorandum; p. 124, Rollo).

We are not convinced by petitioner's submissions because the disquisition in support thereof rests
on the erroneous impression that the day on which the first publication was made, or on March 28,
1969, should be excluded pursuant to the third paragraph of Article 17 of the New Civil Code.

It must be conceded that Article 17 is completely silent as to the definition of what is a "week".
In Concepcion vs. Zandueta (36 O.G. 3139 [1938]; Moreno, Philippine Law Dictionary, Second Ed.,
1972, p. 660), this term was interpreted to mean as a period of time consisting of seven consecutive
days — a definition which dovetails with the ruling in E.M. Derby and Co. vs. City of Modesto, et al.
(38 Pac. Rep. 900 [1984]; 1 Paras, Civil Code of the Philippines Annotated, Twelfth Ed., 1989, p. 88;
1 Tolentino, Commentaries and Jurisprudence on th Civil Code, 1990, p. 46). Following the
interpretation in Derby as to the publication of an ordinance for "at least two weeks" in some
newspaper that:
 . . . here there is no date or event suggesting the exclusion of the first day's
publication from the computation, and the cases above cited take this case out of the
rule stated in Section 12, Code Civ. Proc. which excludes the first day and includes
the last;

the publication effected on April 11, 1969 cannot be construed as sufficient advertisement for
the second week because the period for the first week should be reckoned from March 28,
1969 until April 3, 1969 while the second week should be counted from April 4, 1969 until
April 10, 1969. It is clear that the announcement on April 11, 1969 was both theoretically and
physically accomplished during the first day of the third week and cannot thus be equated
with compliance in law. Indeed, where the word is used simply as a measure of duration of
time and without reference to the calendar, it means a period of seven consecutive days
without regard to the day of the week on which it begins (1 Tolentino, supra at p. 467 citing
Derby).

Certainly, it would have been absurd to exclude March 28, 1969 as reckoning point in line with the
third paragraph of Article 13 of the New Civil Code, for the purpose of counting the first week of
publication as to the last day thereof fall on April 4, 1969 because this will have the effect of
extending the first week by another day. This incongruous repercussion could not have been the
unwritten intention of the lawmakers when Act No. 3135 was enacted. Verily, inclusion of the first
day of publication is in keeping with the computation in Bonnevie vs. Court of Appeals (125 SCRA
122 [1983]) where this Court had occasion to pronounce, through Justice Guerrero, that the
publication of notice on June 30, July 7 and July 14, 1968 satisfied the publication requirement under
Act No. 3135. Respondent court cannot, therefore, be faulted for holding that there was no
compliance with the strict requirements of publication independently of the so- called admission in
judicio.

WHEREFORE, the petitions for certiorari and intervention are hereby dismissed and the decision of
the Court of Appeals dated April 17, 1991 is hereby affirmed in toto.

SO ORDERED.