Cases in Credit Trans on MORTGAGE

7/27/2019 Cases in Credit Trans on MORTGAGE

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1. SPOUSES GODOFREDO & DOMINICA FLANCIA,petitioners, vs. COURT OF APPEALS & WILLIAM ONGGENATO, respondents.

D E C I S I O NCORONA, J.:

Before us is a petition for review under Rule 45 of the Rules of Court,

seeking to set aside the October 6, 2000 decision[1] of the Court ofAppeals in CA-G.R. CV No. 56035.

The facts as outlined by the trial court[2] follow.

This is an action to declare null and void the mortgage executed bydefendant Oakland Development Resources Corp. xxx in favor ofdefendant William Ong Genato over the house and lot plaintiffsspouses Godofredo and Dominica Flancia purchased from defendantcorporation.

In the complaint, plaintiffs allege that they purchased from

defendant corporation a parcel of land known as Lot 12, Blk. 3,Phase III-A containing an area of 128.75 square meters situated in

Prater Village Subd. II located at Brgy. Old Balara, Quezon City; thatby virtue of the contract of sale, defendant corporation authorizedplaintiffs to transport all their personal belongings to their house at

the aforesaid lot; that on December 24, 1992, plaintiffs received acopy of the execution foreclosing [the] mortgage issued by the RTC,Branch 98 ordering defendant Sheriff Sula to sell at public auctionseveral lots formerly owned by defendant corporation includingsubject lot of plaintiffs; that the alleged mortgage of subject lot is

null and void as it is not authorized by plaintiffs pursuant to Art.2085 of the Civil Code which requires that the mortgagor must bethe absolute owner of the mortgaged property; that as aconsequence of the nullity of said mortgage, the executionforeclosing [the] mortgage is likewise null and void; that plaintiffs

advised defendants to exclude subject lot from the auction sale butthe latter refused. Plaintiffs likewise prayed for damages in the sum

of P50,000.00.

Defendant William Ong Genato filed a motion to dismiss thecomplaint which was opposed by the plaintiffs and denied by theCourt in its Order dated February 16, 1993.

Defendant Genato, then filed his answer averring that on May 19,

1989 co-defendant Oakland Development Resources Corporationmortgaged to Genato two (2) parcels of land covered by TCT Nos.356315 and 366380 as security and guaranty for the payment of aloan in the sum of P2,000,000.00; that it appears in the complaintthat the subject parcel of land is an unsubdivided portion of the

aforesaid TCT No. 366380 which covers an area of 4,334 squaremeters more or less; that said real estate mortgage has been duly

annotated at the back of TCT No. 366380 on May 22, 1989; that fornon-payment of the loan of P2,000,000.00 defendant Genato filed

an action for foreclosure of real estate mortgage against co-defendant corporation; that after [trial], a decision was rendered bythe Regional Trial Court of Quezon City, Branch 98 against defendantcorporation which decision was affirmed by the Honorable Court ofAppeals; that the decision of the Court of Appeals has long become

final and thus, the Regional Trial Court, Brach 98 of Quezon Cityissued an Order dated December 7, 1992 ordering defendant SheriffErnesto Sula to cause the sale at public auction of the propertiescovered by TCT No. 366380 for failure of defendant corporation todeposit in Court the money judgment within ninety (90) days fromreceipt of the decision of the Court of Appeals; that plaintiffs haveno cause of action against defendant Genato; that the allegedplaintiffs Contract to Sell does not appear to have been registered

with the Register of Deeds of Quezon City to affect defendant

Genato and the latter is thus not bound by the plaintiffs Contract to

Sell; that the registered mortgage is superior to plaintiffs alleged

Contract to Sell and it is sufficient for defendant Genato asmortgagee to know that the subject TCT No. 366380 was clean at

the time of the execution of the mortgage contract with defendantcorporation and defendant Genato is not bound to go beyond the

title to look for flaws in the mortgagors title; that plaintiffs alleged

Contract to Sell is neither a mutual promise to buy and sell nor aContract of Sale. Ownership is retained by the seller, regardless of

delivery and is not to pass until full payment of the price; thatdefendant Genato has not received any advice from plaintiffs to

exclude the subject lot from the auction sale, and by way ofcounterclaim, defendant Genato prays for P150,000.00 moral

damages and P20,000.00 for attorneys fees.

On the other hand, defendant Oakland Development ResourcesCorporation likewise filed its answer and alleged that the complaintstates no cause of action; xxx Defendant corporation also prays for

attorneys fees of P20,000.00 in its counterclaim.*3+

After trial, the assisting judge[4] of the trial court rendered adecision dated August 16, 1996, the decretal portion of whichprovided:

Wherefore, premises considered, judgment is hereby rendered.

1) Ordering defendant Oakland Devt. Resources Corporation to pay

plaintiffs:

a) the amount of P10,000.00 representing payment for the option

to purchase lot;b) the amount of P140,000.00 representing the first downpaymentof the contract price;

c) the amount of P20,520.80 representing five monthlyamortizations for February, March, April, May and June 1990;

d) the amount of P3,000.00 representing amortization forNovember 1990; all plus legal interest from the constitution of the

mortgage up to the time the instant case was filed.2) Ordering said defendant corporation to pay further to plaintiffsthe sum of P30,000.00 for moral damages, P10,000.00 for exemplary

damages and P20,000.00 for and as reasonable attorneys fees plus

cost;

3) Dismissing defendant corporations counterclaim;

4) Dismissing defendant Genatos counterclaim.*5+

On motion for reconsideration, the regular presiding judge set asidethe judgment of the assisting judge and rendered a new one on

November 27, 1996, the decretal portion of which read:

WHEREFORE, premises considered, the Motion for Reconsiderationis hereby GRANTED. The decision dated August 16, 1996 is herebyset aside and a new one entered in favor of the plaintiffs, declaringthe subject mortgage and the foreclosure proceedings heldthereunder as null and void insofar as they affect the superior right

of the plaintiffs over the subject lot, and ordering as follows:

1. Defendant Oakland Development Resources to pay to plaintiffsthe amount of P20,000.00 for litigation-related expenses;

2. Ordering defendant Sheriff Ernesto L. Sula to desist fromconducting further proceedings in the extra-judicial foreclosureinsofar as they affect the plaintiffs, or, in the event that title has


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been consolidated in the name of defendant William O. Genato,ordering said defendant to reconvey to plaintiffs the titlecorresponding to Lot 12, Blk. 3, Phase III-A of Prater Village [Subd. II],

located in Old Balara, Quezon City, containing an area of 128.75square meters; and

3. Dismissing the counterclaims of defendants Oakland and Genato

and with costs against them.[6]

On appeal, the Court of Appeals issued the assailed order:

Wherefore, foregoing premises considered, the appeal having merit

in fact and in law is hereby GRANTED and the decision of the TrialCourt dated 27 November 1996 hereby SET ASIDE and REVERSED,and its judgment dated August 16, 1996 REINSTATED and AFFIRMEDIN TOTO. No Costs.

SO ORDERED.[7]

Hence, this petition.

For resolution before us now are the following issues:

(1) whether or not the registered mortgage constituted over the

property was valid;

(2) whether or not the registered mortgage was superior to thecontract to sell; and

(3) whether or not the mortgagee was in good faith.

Under the Art. 2085 of the Civil Code, the essential requisites of acontract of mortgage are: (a) that it be constituted to secure thefulfillment of a principal obligation; (b) that the mortgagor be the

absolute owner of the thing mortgaged; and (c) that the personsconstituting the mortgage have the free disposal of their property,

and in the absence thereof, that they be legally authorized for thepurpose.

All these requirements are present in this case.

FIRST ISSUE: WAS THE REGISTERED MORTGAGE VALID?

As to the first essential requisite of a mortgage, it is undisputed thatthe mortgage was executed on May 15, 1989 as security for a loanobtained by Oakland from Genato.

As to the second and third requisites, we need to discuss the

difference between a contract of sale and a contract to sell.

In a contract of sale, title to the property passes to the vendee uponthe delivery of the thing sold; in a contract to sell, ownership is, by

agreement, reserved by the vendor and is not to pass to the vendeeuntil full payment of the purchase price.

Otherwise stated, in a contract of sale, the vendor loses ownershipover the property and cannot recover it unless and until the contract

is resolved or rescinded; in a contract to sell, title is retained by thevendor until full payment of the price.[8]

In the contract between petitioners and Oakland, aside from the factthat it was denominated as a contract to sell, the intention ofOakland not to transfer ownership to petitioners until full paymentof the purchase price was very clear. Acts of ownership over theproperty were expressly withheld by Oakland from petitioner. All

that was granted to them by the occupancy permit was the rightto possess it.

Specifically, the contract between Oakland and petitioners stated:

xxx xxx xxx

7. That the BUYER/S may be allowed to enter into and takepossession of the property upon issuance of Occupancy Permit bythe OWNER/DEVELOPER exclusively, although title has not yet

passed to the BUYER/S, in which case his possession shall be that ofa possessor by mere tolerance Lessee, subject to certain restrictions

contained in this deed.

xxx xxx xxx

13. That the BUYER/S cannot sell, mortgage, cede, transfer, assignor in any manner alienate or dispose of, in whole or in part, therights acquired by and the obligations imposed on the BUYER/S by

virtue of this contract, without the express written consent of theOWNER/DEVELOPER.

xxx xxx xxx

24. That this Contract to Sell shall not in any way [authorize] theBUYER/S to occupy the assigned house and lot to them.[9]

xxx xxx xxx

Clearly, when the property was mortgaged to Genato in May 1989,what was in effect between Oakland and petitioners was a contractto sell, not a contract of sale. Oakland retained absolute ownershipover the property.

Ownership is the independent and general power of a person over athing for purposes recognized by law and within the limits

established thereby.[10] According to Art. 428 of the Civil Code, thismeans that:

The owner has the right to enjoy and dispose of a thing, withoutother limitations than those established by law.

xxx xxx xxx

Aside from the jus utendi and the jus abutendi [11] inherent in theright to enjoy the thing, the right to dispose, or the jus disponendi, isthe power of the owner to alienate, encumber, transform and evendestroy the thing owned.[12]

Because Oakland retained all the foregoing rights as owner of the

property, it was entitled absolutely to mortgage it to Genato. Hence,the mortgage was valid.

SECOND ISSUE: WAS THE REGISTERED MORTGAGE SUPERIOR TOTHE CONTRACT TO SELL?

In their memorandum, petitioners cite our ruling in State

Investment House, Inc. v. Court of Appeals [13] to the effect that anunregistered sale is preferred over a registered mortgage over thesame property. The citation is misplaced.

This Court in that case explained the rationale behind the rule:


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The unrecorded sale between respondents-spouses and SOLID ispreferred for the reason that if the original owner xxx had partedwith his ownership of the thing sold then he no longer had

ownership and free disposal of that thing as to be able to mortgageit again.

State Investment House is completely inapplicable to the case at

bar. A contract of sale and a contract to sell are worlds apart. StateInvestment House clearly pertained to a contract of sale, not to acontract to sell which was what Oakland and petitioners had. In

State Investment House, ownership had passed completely to thebuyers and therefore, the former owner no longer had any legal

right to mortgage the property, notwithstanding the fact that thenew owner-buyers had not registered the sale. In the case beforeus, Oakland retained absolute ownership over the property underthe contract to sell and therefore had every right to mortgage it.

In sum, we rule that Genatos registered mortgage was superior to

petitioners contract to sell, subject to any liabilities Oakland mayhave incurred in favor of petitioners by irresponsibly mortgaging theproperty to Genato despite its commitments to petitioners under

their contract to sell.

THIRD ISSUE: WAS THE MORTGAGE IN GOOD FAITH?

The third issue involves a factual matter which should not be raisedin this petition. Only questions of law may be raised in a Rule 45petition. This Court is not a trier of facts. The resolution of factualissues is the function of the lower courts. We therefore adopt the

factual findings of the Court of Appeals and uphold the good faith ofthe mortgagee Genato.

RELIANCE ON WHAT APPEARS IN THE TITLE

Just as an innocent purchaser for value may rightfully rely on whatappears in the certificate of title, a mortgagee has the right to rely

on what appears in the title presented to him. In the absence ofanything to arouse suspicion, he is under no obligation to look

beyond the certificate and investigate the title of the mortgagorappearing on the face of the said certificate. [14]

We agree with the findings and conclusions of the trial courtregarding the liabilities of Oakland in its August 16, 1996 decision, as

affirmed by the Court of Appeals:

Anent *plaintiffs+ prayer for damages, the Court finds thatdefendant corporation is liable to return to plaintiffs all theinstallments/payments made by plaintiffs consisting of the amount

of P10,000.00 representing payment for the option to purchase lot;

the amount of P140,000.00 which was the first downpayment; the

sum of P20,520.80 representing five monthly amortizations forFebruary, March, April, May and June 1990 and the amount of

P3,000.00 representing amortization for November 1990 plus legalinterest from the time of the mortgage up to the time this instantcase was filed. Further, considering that defendant corporationwantonly and fraudulently mortgaged the subject property without

regard to *plaintiffs+ rights over the same, said defendant should

pay plaintiffs moral damages in the reasonable amount ofP30,000.00. xxx Furthermore, since defendant *corporations+ acts

have compelled the plaintiffs to litigate and incur expenses toprotect their interest, it should likewise be adjudged to pay

plaintiffs attorneys fees of P20,000.00 under Article 2208paragraph two (2) of the Civil Code.[15]

WHEREFORE, the petition for review is hereby DENIED. The decisionof the Court of Appeals reinstating the August 16, 1996 decision ofthe trial court is hereby AFFIRMED.

2. G.R. No. L-17072 October 31, 1961CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,vs.

BRIGIDA MARCOS, ET AL., defendants-appellants.

Aladin B. Bermudez for defendants-appellants.Cube and Fajardo for plaintiff-appellee.

REYES, J.B.L., J.:

The main question in this appeal is whether or not a mortgagee mayforeclose a mortgage on a piece of land covered by a free patent

where the mortgage was executed before the patent was issued andis sought to be foreclosed within five years from its issuance.

The facts of the case appear to be as follows:

On May 17, 1954, defendant Brigida Marcos obtained a loan in theamount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista andto secure payment thereof conveyed to the latter by way ofmortgage a two (2)-hectare portion of an unregistered parcel of landsituated in Sta. Ignacia, Tarlac. The deed of mortgage, Exhibit "A",

provided that it was to last for three years, that possession of theland mortgaged was to be turned over to the mortgagee by way ofusufruct, but with no obligation on her part to apply the harvests tothe principal obligation; that said mortgage would be released onlyupon payment of the principal loan of P2,000 without any interest;

and that the mortgagor promised to defend and warrant themortgagee's rights over the land mortgaged.

Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in

behalf of the heirs of her deceased mother Victoriana Cainglet (whoare Brigida herself and her three sisters), an application for theissuance of a free patent over the land in question, on the strength

of the cultivation and occupation of said land by them and theirpredecessor since July, 1915. As a result, Free Patent No. V-64358

was issued to the applicants on January 25, 1957, and on February22, 1957, it was registered in their names under Original Certificateof Title No. P-888 of the office of Register of Deeds for the provinceof Tarlac.

Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff havingremained unpaid up to 1959, the latter, on March 4, 1959, filed the

present action against Brigida and her husband (Civil Case No. 3382)in the court below for the payment thereof, or in default of the

debtors to pay, for the foreclosure of her mortgage on the land giveas security. Defendants moved to dismiss the action, pointing outthat the land in question is covered by a free patent and could not,therefore, under the Public Land Law, be taken within five yearsfrom the issuance of the patent for the payment of any debts of the

patentees contracted prior to the expiration of said five-year period;but the lower court denied the motion to dismiss on the ground thatthe law cited does not apply because the mortgage sought to beforeclosed was executed before the patent was issued. Defendantsthen filed their answer, reiterating the defense invoked in theirmotion to dismiss, and alleging as well that the real contractbetween the parties was an antichresis and not a mortgage. Pre-triaof the case followed, after which the lower court rendered judgment


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finding the mortgage valid to the extent of the mortgagor's pro-indiviso share of 15,333 square meters in the land in question, onthe theory that the Public Land Law does not apply in this case

because the mortgage in question was executed before a patent wasissued over the land in question; that the agreement of the parties

could not be antichresis because the deed Exhibit "A" clearly showsa mortgage with usufruct in favor of the mortgagee; and ordered the

payment of the mortgage loan of P2,000 to plaintiff or, upondefendant's failure to do so, the foreclosure of plaintiff's mortgageon defendant Brigida Marcos' undivided share in the land in

question. From this judgment, defendants Brigida Marcos and herhusband Osmondo Apolocio appealed to this Court.

There is merit in the appeal.

The right of plaintiff-appellee to foreclose her mortgage on the landin question depends not so much on whether she could take saidland within the prohibitive period of five years from the issuance ofdefendants' patent for the satisfaction of the indebtedness in

question, but on whether the deed of mortgage Exhibit "A" is at allvalid and enforceable, since the land mortgaged was apparently still

part of the public domain when the deed of mortgage wasconstituted. As it is an essential requisite for the validity of amortgage that the mortgagor be the absolute owner of the thing

mortgaged (Art. 2085), the mortgage here in question is void andineffective because at the time it was constituted, the mortgagorwas not yet the owner of the land mortgaged and could not, for thatreason, encumber the same to the plaintiff-appellee. Nor could thesubsequent acquisition by the mortgagor of title over said land

through the issuance of a free patent validate and legalize the deedof mortgage under the doctrine of estoppel (cf. Art. 1434, New CivilCode,1 since upon the issuance of said patient, the land in questionwas thereby brought under the operation of the Public Land Lawthat prohibits the taking of said land for the satisfaction of debts

contracted prior to the expiration of five years from the date of theissuance of the patent (sec. 118, C.A. No. 141). This prohibition

should include not only debts contracted during the five-year periodimmediately preceding the issuance of the patent but also those

contracted before such issuance, if the purpose and policy of thelaw, which is "to preserve and keep in the family of the homesteaderthat portion of public land which the State has gratuitously given to

him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v.Roman Catholic Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is

to be upheld.

The invalidity of the mortgage Exhibit "A" does not, however, implythe concomitant invalidity of the collate agreement in the samedeed of mortgage whereby possession of the land mortgaged was

transferred to plaintiff-appellee in usufruct, without any obligationon her part to account for its harvests or deduct them from

defendants' indebtedness of P2,000. Defendant Brigida Marcos,who, together with her sisters, was in possession of said land by

herself and through her deceased mother before her since 1915,had possessory rights over the same even before title vested in heras co-owner by the issuance of the free patent to her and her sisters,and these possessory right she could validly transfer and convey toplaintiff-appellee, as she did in the deed of mortgage Exhibit "A".

The latter, upon the other hand, believing her mortgagor to be theowner of the land mortgaged and not being aware of any flaw whichinvalidated her mode of acquisition, was a possessor in good faith(Art. 526, N.C.C.), and as such had the right to all the fruits receivedduring the entire period of her possession in good faith (Art. 544,N.C.C.). She is, therefore, entitled to the full payment of her credit ofP2,000 from defendants, without any obligation to account for thefruits or benefits obtained by her from the land in question.

WHEREFORE, the judgment appealed from is reversed insofar as itorders the foreclosure of the mortgage in question, but affirmed in

all other respects. Costs again defendants-appellants.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,Paredes and De Leon, JJ., concur.

Barrera, J., took no part.

Footnotes

1 Art. 1434, N.C.C. provides that "When a person who is not theowner of a thing sells or alienates and delivers it, and later the selleror grantor acquires title thereto, such title passes by operation oflaw to the buyer or grantee."

3. G.R. No. L-26371 September 30, 1969MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,vs.RUTH R. DIOCARES, ET AL., defendants-appellees.

Faylona, Berroya, Norte and Associates for plaintiff-appellant.

Vivencio G. Ibrado Jr. for defendants-appellees.FERNANDO, J.:

It may very well be, as noted by jurists of repute, that to stressthe element of a promise as the basis of contracts is to acknowledgethe influence of natural law. 1 Nonetheless, it does not admit of

doubt that whether under the civil law or the common law, theexistence of a contract is unthinkable without one's word beingplighted. So the New Civil Code provides: "A contract is a meeting ofminds between two persons whereby one binds himself, withrespect to the other, to give something or to render some service." 2

So it is likewise under American law. Thus: "A contract is a promiseor a set of promises for the breach of which the law gives a remedy,

or the performance of which the law in some way recognizes as aduty." 3

The law may go further and require that certain formalities beexecuted. Thus, for a mortgage to be validly constituted, "it isindispensable, ..., that the document in which it appears be recorded

in the Registry of Property." The same codal provision goes on: "Ifthe instrument is not recorded, the mortgage is nevertheless binding

between the parties." 4The question before us in this appeal from a lower court

decision, one we have to pass upon for the first time, is the effect, ifany, to be given to a mortgage contract admittedly not registered,only the parties being involved in the suit. The lower court was of

the opinion that while it "created a personal obligation [it] did notestablish a real estate mortgage." 5 It did not decree foreclosure

therefor. Plaintiff-appellant appealed. We view the matterdifferently and reverse the lower court.

The case for the plaintiff, Mobil Oil Philippines, Inc., nowappellant, was summarized in the lower court order of February 25,1966, subject of this appeal. Thus: "In its complaint plaintiff alleged

that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T.Diocares entered into a contract of loan and real estate mortgagewherein the plaintiff extended to the said defendants a loan ofP45,000.00; that said defendants also agreed to buy from theplaintiff on cash basis their petroleum requirements in an amount ofnot less than 50,000 liters per month; that the said defendants willpay to the plaintiff 9-1/2% per annum on the diminishing balance ofthe amount of their loan; that the defendants will repay the said


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loan in monthly installments of P950.88 for a period of five (5) yearsfrom February 9, 1965; that to secure the performance of theforegoing obligation they executed a first mortgage on two parcels

of land covered by Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds of Bacolod City. The

agreement further provided that in case of failure of the defendantsto pay any of the installments due and purchase their petroleum

requirements in the minimum amount of 50,000 liters per monthfrom the plaintiff, the latter has the right to foreclose the mortgageor recover the payment of the entire obligation or its remaining

unpaid balance; that in case of foreclosure the plaintiff shall beentitled to 12% of the indebtedness as damages and attorney's fees.

A copy of the loan and real estate mortgage contract executedbetween the plaintiff and the defendants is attached to thecomplaint and made a part thereof. The complaint further allegesthat the defendant paid only the amount of P1,901.76 to theplaintiff, thus leaving a balance of P43,098.24, excluding interest, ontheir indebtedness. The said defendants also failed to buy on cashbasis the minimum amount of petroleum which they agreed to

purchase from the plaintiff. The plaintiff, therefore, prayed that thedefendants be ordered to pay the amount of P43,098.24, with

interest at 9-1/2% per annum from the date it fell due, and indefault of such payment that the mortgaged properties be sold andthe proceeds applied to the payment of defendants' obligation." 6

Defendants, Ruth R. Diocares and Lope T. Diocares, nowappellees, admitted their indebtedness as set forth above, denyingmerely the alleged refusal to pay, the truth, according to them,

being that they sought for an extension of time to do so, inasmuchas they were not in a position to comply with their obligation. Theyfurther set forth that they did request plaintiff to furnish them withthe statement of accounts with the view of paying the same oninstallment basis, which request was, however, turned down by the

plaintiff.

Then came a motion from the plaintiff for a judgment on thepleadings, which motion was favorably acted on by the lower court.

As was stated in the order appealed from: "The answer of thedefendants dated October 21, 1965 did not raise any issue. On thecontrary, said answer admitted the material allegations of the

complaint. The plaintiff is entitled to a judgment on the pleadings." 7

As to why the foreclosure sought by plaintiff was denied, thelower court order on appeal reads thus: "The Court cannot,however, order the foreclosure of the mortgage of properties, asprayed for, because there is no allegation in the complaint nor doesit appear from the copy of the loan and real estate mortgage

contract attached to the complaint that the mortgage had beenregistered. The said loan agreement although binding among the

parties merely created a personal obligation but did not establish areal estate mortgage. The document should have been registered.

(Art. 2125, Civil Code of the Phil.)" 8 The dispositive portion is thuslimited to ordering defendants "to pay the plaintiff the account ofP43,098.24, with interest at the rate of 9-1/2% per annum from thedate of the filing of the complaint until fully paid, plus the amount ofP2,000.00 as attorneys' fees, and the costs of the suit." 9

Hence this appeal, plaintiff-appellant assigning as errors theholding of the lower court that no real estate mortgage wasestablished and its consequent refusal to order the foreclosure ofthe mortgaged properties. As set forth at the outset, we find theappeal meritorious. The lower court should not have held that noreal estate mortgage was established and should have ordered itsforeclosure.

The lower court predicated its inability to order the foreclosurein view of the categorical nature of the opening sentence of the

governing article 10 that it is indispensable, "in order that amortgage may be validly constituted, that the document in which it

appears be recorded in the Registry of Property." Note that itignored the succeeding sentence: "If the instrument is not recorded,

the mortgage is nevertheless binding between the parties." Itsconclusion, however, is that what was thus created was merely "apersonal obligation but did not establish a real estate mortgage."

Such a conclusion does not commend itself for approval. The

codal provision is clear and explicit. Even if the instrument were notrecorded, "the mortgage is nevertheless binding between theparties." The law cannot be any clearer. Effect must be given to it aswritten. The mortgage subsists; the parties are bound. As betweenthem, the mere fact that there is as yet no compliance with therequirement that it be recorded cannot be a bar toforeclosure.1awphl.nt

A contrary conclusion would manifest less than full respect to

what the codal provision ordains. The liability of the mortgagor istherein explicitly recognized. To hold, as the lower court did, that noforeclosure would lie under the circumstances would be to render

the provision in question nugatory. That we are not allowed to do.What the law requires in unambiguous language must be lived up toNo interpretation is needed, only its application, the undisputedfacts calling for it. 11

Moreover to rule as the lower court did would be to show lessthan fealty to the purpose that animated the legislators in givingexpression to their will that the failure of the instrument to berecorded does not result in the mortgage being any the less "bindingbetween the parties." In the language of the Report of the Code

Commission: "In article [2125] an additional provision is made that ifthe instrument of mortgage is not recorded, the mortgage is

nevertheless binding between the parties." 12 We are not free toadopt then an interpretation, even assuming that the codal

provision lacks the forthrightness and clarity that this particularnorm does and, therefore, requires construction, that wouldfrustrate or nullify such legislative objective.

Nor is the reason difficult to discern why such an exception

should be made to the rule that is indispensable for a mortgage tobe validly constituted that it be recorded. Equity so demands, and

justice is served. There is thus full acknowledgment of the bindingeffect of a promise, which must be lived up to, otherwise thefreedom a contracting party is supposed to possess becomes

meaningless. It could be said of course that to allow foreclosure inthe absence of such a formality is to offend against the demands of

jural symmetry. What is "indispensable" may be dispense with. Suchan objection is far from fatal. This would not be the first time when

logic yields to what is fair and what is just. To such an overmasteringrequirement, law is not immune.

WHEREFORE, the lower court order of February 25, 1966 isaffirmed with the modification that in default of the payment of the

above amount of P43,028.94 with interests at the rate of 9-1/2% perannum from the date of the filing of the complaint, that themortgage be foreclosed with the properties subject thereof beingsold and the proceeds of the sale applied to the payment of theamounts due the plaintiff in accordance with law. With costs againstdefendants-appellees.

4. G.R. No. L-50501 April 22, 1991


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RODOLFO GUIANG, petitioner,vs.RICARDO C. SAMANO, JUDGE SERAFIN E. CAMILON, andHONORABLE COURT OF APPEALS, respondents.

Manuel E. Yuzon for petitioner.

Benjamin E. Paggao for private respondent.

BIDIN, J.:p

This is a petition for review on certiorari seeking to reverse and setaside the Decision 1 of the Court of Appeals dated April 30, 1979 inCA-G.R. No. SP-08690 entitled "Rodolfo Guiang vs. Ricardo C.Samano, et. al." which affirmed the Decision 2 of the Court of FirstInstance of Rizal, Branch VIII dated November 9, 1978 in Civil Case

No. 29475 entitled "Ricardo C. Samano vs. Rodolfo Guiang" which, inturn, affirmed in all respects the Decision 3 of the Municipal Court of

Makati dated April 12, 1978 in Civil Case No. 15250 entitled "RicardoC. Samano vs. Rodolfo Guiang", ordering therein defendant (hereinpetitioner) to vacate the premises and to pay therein plaintiff

(herein private respondent) the amount of P40.00 a month fromNovember, 1977 until he (herein petitioner) vacates the premisesplus attorney's fees and the costs of suit.

As culled from the records, the uncontroverted facts of this case are

as follows:

Sometime in 1961, petitioner verbally leased a portion of a parcel ofland located at 533 Lacuna Street, Bangkal, Makati, Metro Manilabelonging to private respondent at an agreed monthly rental of

P40.00.

Immediately after petitioner occupied the aforesaid lot, heconstructed a house thereon for which he spent the amount of

P8,000.00.

On December 18, 1975, private respondent filed an ejectment case

docketed as Civil Case No. 14704 against the petitioner before theMunicipal Court of Makati on the ground that the petitioner as

defendant failed to pay the monthly rentals of P40.00 from July toDecember, 1975 in the total sum of P240.00.

But before said case could be tried on the merits, the parties theretofiled a joint motion to dismiss the same. Hence, an order dated

August 20, 1976 was issued dismissing the case on the ground that ithas been settled amicably.

Barely a month thereafter or on September 14, 1976, private

respondent filed another ejectment case docketed as Civil Case No.15250 against petitioner before the same court, alleging, amongothers, as basis for his cause of action, the following:

3. That defendant has been in arrears since August, 1975 up

to the present, on in total amount of Five Hundred Sixty (P560.00)Pesos, Philippine Currency, and despite oral and written demands,the last written demand of which is dated August 21, 1976, thru thepersonal service, a xerox copy of said demand is hereto attached,marked as Annex "A" and considered as an integral part hereof,defendant failed and refused as he fails and refuses to vacate thepremises removing his house thereat and paying his obligations, tothe damage and prejudice of the herein plaintiff.

In his Answer with Counterclaim dated October 13, 1976, petitioneralleged that:

3. Defendant specifically denies the allegations contained in

paragraph 3 of the complaint to the effect that he has failed andrefused to pay his arrearages the truth of the matter being those

alleged in defendant's Affirmative and Special Defenses.

The aforesaid Affirmative and Special Defenses allegations reads as

follows:

7. That since 1961 up to and until 12 June 1975, date ofreceipt of payment for rental due for July 1975, defendant has beenreligiously paying the agreed rent on the premises;

8. That in or about the latter part of July 1975, plaintiffapproached the defendant herein and intimated his (plaintiffs)intentions of increasing the rental on the premises from P40.00 to

P120.00 a month, however, due to some financial problems thedefendant then found himself confronted with, the latter declined

and refused to accede to plaintiffs request and demands for a raiseof rentals on the premises;

9. That since then and up to the present, the plaintiff hadrefused to accept the monthly payments of P40.00 tendered on himso that the defendant was constrained to deposit the rentals duethereon with a bank so that at any time, defendant could withdrawand pay his arrearages, the accumulation of which is not due to

defendant's faults.

After trial, a decision dated April 12, 1978 was rendered by theMunicipal Court of Makati, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby renderedfor the plaintiff Ricardo, Samano and against the defendant Rodolfo

Guiang, to wit:

1. ordering the defendant and all persons claiming rightsunder him to immediately vacate the premises in litis and restorepossession thereof to herein plaintiff.

2. ordering the defendant to pay plaintiff the amount of

Forty (P40.00) Pesos a month from November 1977 until he finallyvacates the premises;

3. ordering the defendant to pay plaintiff the sum of FiveHundred (P500.00) Pesos by way attorney's fees; and

4. ordering the defendant to pay the costs of suit.

SO ORDERED.

On appeal by petitioner to the Court of First Instance of Rizal, thedecision of the trial court was affirmed in all respects. Thedispositive portion of said CFI judgment dated November 9, 1978,reads

FROM THE FOREGOING, this Court holds that the trial courtcommitted no error in rendering its decision which conforms to theevidence presented and to the law, for which reason, the appeal isdismissed and the decision appealed from is affirmed in all respects,with costs against the defendant.

SO ORDERED.


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Petitioner filed a petition for review with the Court of Appealsattributing to the Court of First Instance of Rizal four (4) errors, to

wit:

1. The respondent judge erred in not reversing the decisionof the Municipal Court of Makati, Metro Manila, dated April 12,

1978 and in not considering that the same is barred by priorjudgment or res judicata rendered in Civil Case No. 14704 entitled"Ricardo C. Samano versus Rodolfo Guiang", Municipal Court of

Makati, Rizal.

2. The respondent judge erred in not ruling that the privaterespondent violated Presidential Decree No. 20 when he clearly toldthe petitioner that he was increasing the rentals from P40.00 toP120.00 a month.

3. The respondent judge erred, that on the assumption thatthe private respondent has the right to eject the petitioner, in not

requiring the said respondent to pay for the value of the house, thepetitioner being lessee is a builder in good faith.

4. That respondent judge erred in not ruling that thepetitioner being a tenant of the premises in question since 1961

continuously up to the present there is a need to fix the period ofthe contract of lease.

In a decision promulgated on April 30, 1979, the Court of Appealsdismissed said petition, the positive part of which reads

Withal, we sustain the decision of the respondent court, the samebeing not only supported by substantial evidence, but fully in accordwith the applicable law as well.

WHEREFORE , the petition for review is hereby dismissed, with costsagainst petitioner Rodolfo Guiang.

SO ORDERED.

Hence, this petition.

In the resolution of October 8, 1979, the First Division of theSupreme Court gave due course to the petit ion and both parties

were required to file simultaneous memoranda. The memorandumfor the petitioner was filed on November 13, 1979 while that of theprivate respondent was filed on January 15, 1980.

The petition is devoid of merit.

The main issue in this case is whether Civil Case No. 14704 for non-

payment of rentals from July, 1975 up to and including December18, 1975 which was allegedly settled amicably constitutes res

judicata and a bar to Civil Case No. 15250 which is also for non-payment of rentals from August, 1975 to September 14, 1976.

Petitioner contends that the findings of the respondent appellatecourt in dismissing the petition were grounded entirely on

speculations, surmises, conjectures and without factual or legalbasis, and said court acted with grave abuse of discretion indismissing the same apparently on the basis of the following: firstly,that the respondent appellate court erred in ruling that the questionof res judicata was not raised by the petitioner in his appealmemorandum and secondly, that the same court erred in ruling thatthe petitioner has not paid the rentals from August to December,1975.

The issues of res judicata and non-payment of rentals from Augustto December, 1975 are purely factual in nature which the Supreme

Court is not bound to review, much less reverse, on appeal. Well-settled is the rule in this jurisdiction that the findings of fact of the

Court of Appeals when supported by substantial evidence, as theyare in the instant case, is beyond the Supreme Court's power of

judicial review. It is not the function of the Supreme Court's powerof judicial review. It is not the function of the Supreme Court toanalyze and weigh such evidence all over again (PNB v. CA, 159 SCRA

433 [1988]).

Even the findings of fact of the trial court are entitled to greatrespect, and carry even more weight when affirmed by the Court ofAppeals (Go Ong vs. CA, 154 SCRA 270). Consequently, the factualfindings of the Court of Appeals are conclusive on the parties(Investment & Development, Inc. vs. CA, 162 SCRA 636).

Moreover, the issue in the case at bar has been settled in the case of

Limpan Investment Corporation vs. Lim Sy, 159 SCRA 484 [1988], thepertinent portion of which reads:

Although the first action of the owner for ejectment of tenant wasdismissed by the court under a judgment that became final and

executory, such dismissal does not preclude the owner from makinga new demand upon the tenant to vacate should the tenant againfail to pay the rents due.

Even assuming that the first ejectment suit docketed as Civil Case

No. 14704 was dismissed on August 20, 1976 (although a copy of thedismissal order is nowhere to be found in the record transmittedfrom the Municipal Court to the respondent court) nonethelesspetitioner's possession of the premises in question became unlawfuland a new cause of action for ejectment accrued, after a written

letter of demand to pay the rentals in arrears from August, 1975 wasserved by private respondent upon petitioner on August 21, 1976

when the latter failed and refused to comply therewith.

Petitioner further contends that the conclusions of the respondentappellate court are contrary to law based on the following grounds:(1) that the respondent appellate court did not fix the period of the

contract of lease, the same having been verbally made without anydefinite period, and (2) that granting that the private respondent

has the right to eject the petitioner from the premises in question,the same court did not order the private respondent to reimbursethe petitioner the value of his house in the amount of at leastP20,000.00 considering the tremendous increases in the price ofconstruction materials and labor.

As correctly ruled by the respondent appellate court:

It should be emphasized that the power granted to the court by

Article 1687 of the Civil Code to fix a longer period for the lease ismerely discretionary, not mandatory (Prieto vs. Santos and Gaddi,98 Phil. 509). In the instant case, the respondent judge can hardly befaulted for refusing to extend the term of the lease, considering thatpetitioner has not sought such extension not sought such extension

either in the trial court or in the respondent court. Besides, the factthat petitioner has not paid the rentals since August, 1975 up to thepresent hardly justifies an extension of petitioner's occupancy of thepremises.

In Divino vs. Marcos, 4 SCRA 186 [1962] this Court held that:


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The power of the courts to "fix a longer term for lease" isprotestative or discretionary, "may" is the word to beexercised or not in accordance with the particular circumstances of

the case; a longer term to be granted where equities come into playdemanding extension, to be denied where none appear, always with

due reference to the parties' freedom to contract.

Admittedly, no definite period for the lease of the premises wasagreed upon between the petitioner and the private respondent.However, as the rent was paid monthly, the period of lease is

considered to be from month-to-month in accordance with Article1687. Thus, when the private respondent in the instant case gave

the petitioner notice to vacate the premises on August 21, 1976, thecontract of lease was deemed to have expired as of the end of thesaid month. As ruled in Baens vs. CA, 125 SCRA [1983]: "even if themonth-to-month agreement is on a verbal basis, if it is shown thatthe lessor needs the property for his own use or for the use of animmediate member of the family or for any of the other statutorygrounds to eject under Section 5 of Batas Pambansa Blg. 25 (in this

case, arrears in payment of rent) which happens to be applicable,then the lease is considered terminated as of the end of the month,

after proper notice or demand to vacate has been given (Zablan vs.CA, 154 SCRA 487 [1987]).

Petitioner's contention that respondent appellate court should haveordered private respondent to remiburse petitioner the value of hishouse, is equally untenable. Under Article 1678 4 of the New CivilCode, the lessor is given the option to pay the lessee one-half of thevalue of the improvements upon termination of the lease. In case

the lessor does not exercise such option, the lessee's remedy is toremove the improvements. Otherwise stated the lessee does nothave the right to demand for the payment of the value of hisimprovements if the lessor does not elect to pay for them but he(the lessee) may remove them.

As ruled by this court in Guzman vs. CA, 177 SCRA 604 [1989], where

the lessees are builders in good faith. Article 1678 of the Civil Codegoverns the rights of the parties thereto. The lessors have the option

to appropriate the house and other useful improvements made onthe leased premises by paying one half of their value. But the lesseesdo not have the right to compel the lessors to appropriate the house

and other useful improvements and make reimbursement nor toretain possession of the subject property until such reimbursement.

Their right under the law is the removal of the house and otheruseful improvements should the lessor refuse to reimburse one halfof their value.

A careful review of the records yields no cogent reason that

warrants a reversal of the decision under view; more importantly, itbeing obvious that this petitioner is intended merely to delay the

final disposition of this case.

WHEREFORE, the petition is Dismissed and the assailed decision ofthe Court of Appeals is Affirmed with treble costs against thepetitioner. This decision shall be immediately executory.

5. G.R. No. 172020 December 6, 2010TRADERS ROYAL BANK, Petitioner,

vs.NORBERTO CASTAARES and MILAGROS CASTAARES,Respondents.

D E C I S I O N

VILLARAMA, JR., J.:

Assailed in this petition for review under Rule 45 of the 1997 Rules

of Civil Procedure, as amended, is the Decision1 dated January 11,2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67257 which

reversed the Joint Decision2 dated August 26, 1998 of the RegionalTrial Court (RTC) of Cebu City, Branch 13 in Civil Case Nos. R-22608

and CEB-112.

The Facts

Respondent-spouses Norberto and Milagros Castaares are engaged

in the business of exporting shell crafts and other handicrafts.Between 1977 and 1978, respondents obtained from petitionerTraders Royal Bank various loans and credit accommodations.Respondents executed two real estate mortgages (REMs) dated Apri18, 1977 and January 25, 1978 covering their properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 and T-37191). As evidenced byPromissory Note No. BD-77-113 dated May 10, 1977, petitioner

released only the amount of P35,000.00 although the mortgagedeeds indicated the principal amounts as P86,000.00 and

P60,000.00.3

Respondents were further granted additional funds on various dates

under promissory notes4 they executed in favor of the petitioner:

Type of Loan Date GrantedAmount

Packing Credit May 10, 1977 P19,000.00Packing Credit May 18, 1977 P25,000.00Packing Credit June 23, 1977 P12,500.00Packing Credit August 19, 1977 P 2,900.00Packing Credit April 4, 1978 P18,000.00

Packing Credit April 19, 1978 P23,000.00On June 22, 1977, petitioner transferred the amount of P1,150.00

from respondents current account to their savings account, whichwas erroneously posted as P1,500.00 but later corrected to reflect

the figure P1,150.00 in the savings account passbook. By the secondquarter of 1978, the loans began to mature and the letters of creditagainst which the packing advances were granted started to expire.

Meanwhile, on December 7, 1979, petitioner, without notifying therespondents, applied to the payment of respondents outstanding

obligations the sum of $4,220.00 or P30,930.49 which was remittedto the respondents thru telegraphic transfer from AMROBANK,Amsterdam by one Richard Wagner. The aforesaid entries in thepassbook of respondents and the $4,220.00 telegraphic transfer

were the subject of respondents letter-complaint5 dated

September 20, 1982 addressed to the Manager of the RegionalOffice of the Central Bank of the Philippines.

For failure of the respondents to pay their outstanding loans with

petitioner, the latter proceeded with the extrajudicial foreclosure ofthe real estate mortgages.6 Thereafter, a Certificate of Sale7covering all the mortgaged properties was issued by Deputy SheriffWilfredo P. Borces in favor of petitioner as the lone bidder forP117,000.00 during the auction sale conducted on November 24,

1981. Said certificate of sale was registered with the Office of theRegister of Deeds on February 4, 1982.

On November 24, 1982, petitioner instituted Civil Case No. R-22608for deficiency judgment, claiming that after applying the proceeds offoreclosure sale to the total unpaid obligations of respondents(P200,397.78), respondents were still indebted to petitioner for the


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sum of P83,397.68.8 Respondents filed their Answer WithCounterclaim on December 27, 1982.9

On February 10, 1983, respondents filed Civil Case No. CEB-112 forthe recovery of the sums of P2,584.27 debited from their savings

account passbook and the equivalent amount of $4,220.00telegraphic transfer, and in addition, $55,258.85 representing the

damage suffered by the respondents from letters of credit left un-negotiated because of petitioners refusal to pay the $4,220.00

demanded by the respondents.10

The cases were consolidated before Branch 13, RTC of Cebu City.

Ruling of the RTC

In a Joint Decision11 dated August 26, 1998, the RTC ruled in favorof the petitioner, as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered

in Civil Case No. R-22608 in favor of the plaintiff and against thedefendants directing the defendants jointly and solidarily to pay

plaintiff the sum of P83,397.68 with legal rate of interest to becomputed from November 24, 1981 (the date of the auction sale)until full payment thereof. They are likewise directed to pay plaintiff

attorneys fees in the sum of P10,000.00 plus litigation expenses inthe amount of P2,500.00.

With cost against defendants.

In CEB-112, judgment is hereby rendered dismissing the complaint.

With cost against the plaintiff.

SO ORDERED.12

The trial court found that despite respondents insistence that the

REM covered only a separate loan for P86,000.00 which theybelieved petitioner committed to lend them, the evidence clearly

shows that said REM was constituted as security for all thepromissory notes. No separate demand was made for the amount ofP86,000.00 stated in the REM, as the demand was limited to the

amounts of the promissory notes. The trial court further noted thatrespondents never questioned the judgment for extrajudicial

foreclosure, the certificate of sale and the deficiency in that case.13

With respect to the passbook entries, the trial court stated that noobjection thereto was made by the respondents until f ive years later

when in a letter dated August 10, 1982, respondents counsel asked

petitioner to be enlightened on the matter. Neither did respondentsprotest the application of the balance (P1,150.00) in the passbook to

his account with petitioner. More important, respondent NorbertoCastaares in his testimony admitted that the matter was already

clarified to him by petitioner and that the latter had the right toapply his deposit to his loan accounts. Admittedly, his complaint hasto do more with the lack of consent on his part and the non-issuanceof official receipt. However, he did not follow up his request forofficial receipt as he did not want to be going back and forth to the

bank.14

CA Ruling

With the trial courts denial of their motion for reconsideration,respondents appealed to the CA. Finding merit in respondents

arguments, the appellate court set aside the trial courts judgment

under its Decision15 dated January 11, 2006, thus:

WHEREFORE, in view of the foregoing premises, judgment is herebyrendered by us GRANTING the appeal filed in this case and

REVERSING AND SETTING ASIDE the Joint Decision dated August 26,1998, Regional Trial Court, 7th Judicial Region, Branch 13, in Civil

Case No. R-22608 and Civil Case No. CEB-112. With regard to CivilCase No. R-22608, the real estate mortgage dated April 18, 1977 is

hereby DECLARED as valid in part as to the amount of P35,000.00actually released in favor of appellants, while the real estatemortgage dated January 26, 1978 is hereby declared as null and

void. Furthermore, in Civil Case No. CEB-112, TRB is hereby orderedto release the amount of US$4,220.90 to the appellants at its

current rate of exchange. No pronouncement as to costs.

SO ORDERED.16

The CA held that the RTC overlooked the fact that there were noadequate evidence presented to prove that petitioner released infull to the respondents the proceeds of the REM loan. Citing Filipinas

Marble Corporation v. Intermediate Appellate Court17 and Naguiatv. Court of Appeals,18 the appellate court declared that where there

was failure of the mortgagee bank to deliver the consideration forwhich the mortgage was executed, the contract of loan was invalidand consequently the accessory contract of mortgage is likewise null

and void. In this case, only P35,000.00 out of the P86,000.00 statedin the REM dated April 18, 1977 was released to respondents, andhence the REM was valid only to that extent. For the same reason,the second REM was null and void since no actual loan proceedswere released to the respondents-mortgagors. The REMs are not

connected to the subsequent promissory notes because these weresigned by respondents for the sole purpose of securing packingcredits and export advances. Further citing Acme Shoe, Rubber andPlastic Corp. v. Court of Appeals,19 the CA stated that the rule is thata pledge, real estate mortgage or antichresis may exceptionally

secure after-incurred obligations only as long as these debts areaccurately described therein. In this case, neither of the two REMs

accurately described or even mentioned the securing of future debtsor obligations.20

The CA thus held that petitioners remedy would be to file a

collection case on the unpaid promissory notes which were not

secured by the REMs.

As to the $4,220.00 telegraphic transfer, the CA ruled that petitionerhad no basis for withholding and applying the said amount to

respondents loan account. Said transaction was separate and

distinct from the contract of loan between petitioner andrespondents. Petitioner had no authority to convert the said

telegraphic transfer into cash since the participation of respondentswas necessary to sign and indorse the disbursement voucher and

check. Moreover, petitioner was not transparent in its actions as itdid not inform the respondents of its intention to apply the

proceeds of the telegraphic transfer to their loan account andworse, it did not even present an off icial receipt to prove payment.Section 5 of Republic Act No. 6426, otherwise known as the ForeignCurrency Deposit Act, provides that there shall be no restriction onthe withdrawability by the depositor of his deposit or the

transferability of the same abroad except those arising fromcontract between the depositor and the bank.21

The Petition

Petitioner raised the following grounds in the review of the CAdecision:


10/2310

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REALESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN PARTTO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE

AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TORESPONDENTS OUT OF THE SUM OF PHP86,000.00.

II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID

THE REAL ESTATE MORTGAGE DATED 26 JANUARY 1978 IN THAT NOACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF THERESPONDENTS.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER

HAD NO BASIS IN WITHHOLDING AND SUBSEQUENTLY APPLYING INPAYMENT OF RESPONDENTS OVERDUE ACCOUNT IN THE

TELEGRAPHIC TRANSFER IN THE AMOUNT OF U.S.$4,220.00.22

Petitioner contends that the CA overlooked the specific stipulationin the REMs that the mortgage extends not only to the amountsspecified therein but also to loans or credits subsequently granted,

which include the packing credits and export advances obtained bythe respondents. Moreover, the amounts indicated on the REMs

need not exactly be the same amounts that should be released andcovered by checks or credit memos, the same being only themaximum sum or "ceiling" which the REM secures, as explained by

petitioners witness, Ms. Blesy Nemeo. Her testimony does notprove that the proceeds of the loans were not released in full, as nocredit memos in the specific amounts received by the respondentscan be presented.

Petitioner argues that the rulings cited by the CA do not at allsupport its conclusion that the promissory notes were totallyunrelated to the REMs. In the Acme case, the pronouncement wasthat the after-incurred obligations must, at the time they arecontracted, only be accurately described in a proper instrument as in

the case of a promissory note. The confusion was brought by the usein the CA decision of the word "therein" which is not found in the

text of the Acme ruling. Besides, it is way too impossible that futureloans can be accurately described, as the CA opined, at the time that

a deed of real estate mortgage is executed. The CAs reliance on thecase of Filipinas Marble Corporation, is likewise misplaced as it findsno application under the facts obtaining in the present case. The

misappropriation by some individuals of the loan proceeds securedby petitioner was the consideration which compelled this Court to

rule that there was failure on the part of DBP to deliver theconsideration for which the mortgage was executed. Similarly, thecase of Naguiat is inapplicable in that there was evidence that anagent of the creditor withheld from the debtor the checksrepresenting the proceeds of the loan pending delivery of additional

collateral.

Finally, petitioner reiterates that it had the right by way of set-offthe telegraphic transfer in the sum of $4,220.00 against the unpaid

loan account of respondents. Citing Bank of the Philippine Islands v.Court of Appeals,23 petitioner asserts that they are boundprincipally as both creditors and debtors of each other, the debtsconsisting of a sum of money, both due, liquidated and demandable,and are not claimed by a third person. Hence, the RTC did not err in

holding that petitioner validly applied the amount of P30,930.20(peso equivalent of $4,220.00) to the loan account of therespondents.

Our Ruling

We rule for the petitioner.

The subject REMs contain the following provision:

That, for and in consideration of certain loans, overdrafts and other

credit accommodations obtained, from the Mortgagee by theMortgagor and/or SPS. NORBERTO V. CASTAARES & MILAGROS M.

CASTAARES and to secure the payment of the same, the principalof all of which is hereby fixed at EIGHTY-SIX THOUSAND PESOS ONLY

(P86,000.00) Pesos, Philippine Currency, as well as those that theMortgagee may hereafter extend to the Mortgagor x x x, includinginterest and expenses or any other obligation owing to the

Mortgagee, whether direct or indirect, principal or secondary, asappears in the accounts, books and records of the Mortgagee x x

x.24 (Emphasis supplied.)

The above stipulation is also known as "dragnet clause" or "blanketmortgage clause" in American jurisprudence that would subsume alldebts of past and future origins. It has been held as a valid and legalundertaking, the amounts specified as consideration in the contractsdo not limit the amount for which the pledge or mortgage stands as

security, if from the four corners of the instrument, the intent tosecure future and other indebtedness can be gathered. A pledge or

mortgage given to secure future advancements is a continuingsecurity and is not discharged by the repayment of the amountnamed in the mortgage until the full amount of all advancements

shall have been paid.25

A "dragnet clause" operates as a convenience and accommodationto the borrowers as it makes available additional funds without theirhaving to execute additional security documents, thereby saving

time, travel, loan closing costs, costs of extra legal services,recording fees, et cetera.26 While a real estate mortgage mayexceptionally secure future loans or advancements, these futuredebts must be sufficiently described in the mortgage contract. Anobligation is not secured by a mortgage unless it comes fairly within

the terms of the mortgage contract.27

In holding that the REMs were null and void, the CA opined that thefull amount of the principal loan stated in the deed should have

been released in full, sustaining the position of the respondents thatthe promissory notes were not secured by the mortgage andunrelated to it. However, a reading of the afore-quoted provision of

the REMs shows that its terms are broad enough to cover packingcredits and export advances granted by the petitioner to

respondents. That the respondents subsequently availed of lettersof credit and export advances in various amounts as reflected in thepromissory notes, buttressed the claim of petitioner that theamounts of P86,000.00 and P60,000.00 stated in the REMs merelyrepresent the maximum total loans which will be secured by the

mortgage. This must be so as respondents confirmed that themortgage was constituted for the purpose of obtaining additional

capital as dictated by the needs of their export business.Significantly, no complaint was made by the respondents as to the

non-release of P86,000.00 and P60,000.00, in full, simultaneous orimmediately following the execution of the REMs -- under a singlepromissory note each equivalent to the said sums -- and no demandfor the said specific amounts was ever made by the petitioner. Eventhe letter-complaint sent by respondents to the Central Bank almost

a year after the extrajudicial foreclosure sale mentioned only thequestioned entries in their passbook and the $4,220.00 telegraphictransfer. Considering that respondents deemed it a serious "bankingmalpractice" for petitioner not to release in full the loan amountstated in the REMs, it can only be inferred that respondentsthemselves understood that the P86,000.00 and P60,000.00indicated in the REMs was intended merely to fix a ceiling for theloan accommodations which will be secured thereby and not the


11/2311

actual principal loan to be released at one time. Thus, the RTC didnot err in upholding the validity of the REMs and ordering therespondents to pay the deficiency in the foreclosure sale to satisfy

the remaining mortgage indebtedness.

The cases relied upon by the CA are all inapplicable to the presentcontroversy.lawph!1 In Filipinas Marble Corporation, we held that

pending the outcome of litigation between DBP which together withBancom officers were alleged by the petitioner-mortgagor to havemisspent and misappropriated the $5 million loan granted by DBP,

the provisions of P.D. No. 385 prohibiting injunctions againstforeclosures by government financial institutions, cannot be

automatically applied. Foreclosure of the mortgaged properties forthe whole amount of the loan was deemed prejudicial to thepetitioner, its employees and their families since the true amount ofthe loan which was applied for the benefit of the petitioner can bedetermined only after a trial on the merits.28 No such act ofmisappropriation by corporate officers appointed by the mortgageeis involved in this case. Besides, the respondents never denied

receiving the amounts under the promissory notes which were allcovered by the REMs and the very obligations subject of the

extrajudicial foreclosure.

As to the ruling in Naguiat, we found therein no compelling reason

to disturb the lower courts finding that the lender did not remit andthe borrower did not receive the proceeds of the loan. Hence, weheld the mortgage contract, being just an accessory contract, as nulland void for absence of consideration.29 In this case, however,respondents admitted they received all the amounts under the

promissory notes presented by the petitioner. The consideration inthe execution of the REMs consist of those credit accommodationsto fund their export transactions. Respondents as an afterthoughtraised issue on the nature of the amounts of principal loan indicatedin the REMs long after these obligations have matured and the

mortgage foreclosed due to their failure to fully settle theiroutstanding accounts with petitioner. Having expressly agreed to the

terms of the REMs which are phrased to secure all such loans andadvancements to be obtained from petitioner, although the

principal amount stated therein were not released at one time andunder several, not just one, subsequently issued promissory notes,respondents may not be allowed to complain later that the amounts

they received were unrelated to the REMs.

On the issue of the $4,220.00 telegraphic transfer which was appliedby the petitioner to the loan account of respondents, we hold thatthe CA erred in holding that petitioner had no authority to do so byway of compensation or set off. In this case, the parties stipulatedon the manner of such set off in case of non-payment of the amount

due under each promissory note.

The subject promissory notes thus provide:

In case of non-payment of this note or any installments thereof atmaturity, I/We jointly and severally, agree to pay an additionalamount equivalent to two per cent (2%) per annum of the amountdue and demandable as penalty and collection charges, in the formof liquidated damages, until fully paid; and the further sum of ten

per cent (10%) thereof in full, without any deduction, as and forattorneys fees whether actually incurred or not, exclusive of costs

and judicial/extrajudicial expenses; moreover, I/We, jointly andseverally, further empower and authorize the TRADERS ROYALBANK, at its option, and without notice, to set-off or to apply to thepayment of this note any and all funds, which may be in its hands ondeposit or otherwise belonging to anyone or all of us, and to hold assecurity therefor any real or personal property, which may be in its

possession or control by virtue of any other contract.30 (Emphasissupplied.)

Agreements for compensation of debts or any obligations when theparties are mutually creditors and debtors are allowed under Art.

1282 of the Civil Code even though not all the legal requisites forlegal compensation are present. Voluntary or conventional

compensation is not limited to obligations which are not yet due.31The only requirements for conventional compensation are (1) thateach of the parties can fully dispose of the credit he seeks to

compensate, and (2) that they agree to the extinguishment of theirmutual credits.32 Consequently, no error was committed by the tria

court in holding that petitioner validly applied, by way ofcompensation, the $4,220.00 telegraphic transfer remitted by

respondents foreign client through the petitioner.

WHEREFORE, the petition is GRANTED. The Decision dated January11, 2006 of the Court of Appeals in CA-G.R. CV No. 67257 isREVERSED and SET ASIDE. The Joint Decision dated August 26, 1998

of the Regional Trial Court of Cebu City, Branch 13 in Civil Case Nos.R-22608 and CEB-112 is REINSTATED and UPHELD.

No pronouncement as to costs.SO ORDERED.

6. G.R. No. 183987 July 25, 2012ASIA TRUST DEVELOPMENT BANK, Petitioner,vs.CARMELO H. TUBLE, Respondent.

D E C I S I O N

SERENO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45of the Revised Rules of Court, seeking to review the Court of Appeals

(CA) 28 March 2008 Decision and 30 July 2008 Resolution in CA-G.R.CV No. 87410. The CA affirmed the Regional Trial Court (RTC)

Decision of 15 May 2006 in Civil Case No. 67973, which granted torespondent the refund of P845,805.491 representing the amount hehad paid in excess of the redemption price.

The antecedent facts are as follows: 2

Respondent Carmelo H. Tuble, who served as the vice-president ofpetitioner Asiatrust Development Bank, availed himself of the carincentive plan and loan privileges offered by the bank. He was also

entitled to the banks Senior Managers Deferred Incentive Plan

(DIP).

Respondent acquired a Nissan Vanette through the companys car

incentive plan. The arrangement was made to appear as a lease

agreement requiring only the payment of monthly rentals.Accordingly, the lease would be terminated in case of the

employees resignation or retirement prior to full payment of the

price.

As regards the loan privileges, Tuble obtained three separate loans.The first, a real estate loan evidenced by the 18 January 1993Promissory Note No. 01423 with maturity date of 1 January 1999,was secured by a mortgage over his property covered by TransferCertificate of Title No. T 145794. No interest on this loan wasindicated.


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The second was a consumption loan, evidenced by the 10 January1994 Promissory Note No. 01434 with the maturity date of 31January 1995 and interest at 18% per annum. Aside from the said

indebtedness, Tuble allegedly obtained a salary loan, his third loan.

On 30 March 1995, he resigned. Subsequently, he was given theoption to either return the vehicle without any further obligation or

retain the unit and pay its remaining book value.

Respondent had the following obligations to the bank after his

retirement: (1) the purchase or return of the Nissan Vanette; (2)P100,000 as consumption loan; (3) P421,800 as real estate loan; and

(4) P16,250 as salary loan.5

In turn, petitioner owed Tuble (1) his pro-rata share in the DIP,which was to be issued after the bank had given the resigned

employees clearance; and (2) P25,797.35 representing his final

salary and corresponding 13th month pay.

Respondent claimed that since he and the bank were debtors andcreditors of each other, the offsetting of loans could legally take

place. He then asked the bank to simply compute his DIP and applyhis receivables to his outstanding loans.6 However, instead ofheeding his request, the bank sent him a 1 June 1995 demand

letter7 obliging him to pay his debts. The bank also required him toreturn the Nissan Vanette. Despite this demand, the vehicle was notsurrendered.

On 14 August 1995, Tuble wrote the bank again to follow up his

request to offset the loans. This letter was not immediately actedupon. It was only on 13 October 1995 that the bank finally allowedthe offsetting of his various claims and liabilities. As a result, hisliabilities were reduced to P970,691.46 plus the unreturned value ofthe vehicle.

In order to recover the Nissan Vanette, the bank filed a Complaint

for replevin against Tuble. Petitioner obtained a favorable judgment.Then, to collect the liabilities of respondent, it also filed a Petition

for Extra-judicial Foreclosure of real estate mortgage over hisproperty. The Petition was based only on his real estate loan, whichat that time amounted to P421,800. His other liabilities to the bank

were excluded. The foreclosure proceedings terminated, with thebank emerging as the purchaser of the secured property.

Thereafter, Tuble timely redeemed the property on 17 March 1997for P1,318,401.91.8 Notably, the redemption price increased to thisfigure, because the bank had unilaterally imposed additional interestand other charges.

With the payment of P1,318,401.91, Tuble was deemed to have fully

paid his accountabilities. Thus, three years after his payment, thebank issued him a Clearance necessary for the release of his DIP

share. Subsequently, he received a Managers Check in the amountof P166,049.73 representing his share in the DIP funds.

Despite his payment of the redemption price, Tuble questioned howthe foreclosure basis of P421,800 ballooned to P1,318,401.91 in a

matter of one year. Belatedly, the bank explained that thisredemption price included the Nissan Vanettes book value, the

salary loan, car insurance, 18% annual interest on the banksredemption price of P421,800, penalty and interest charges onPromissory Note No. 0142, and litigation expenses.9 By way of note,from these items, the amounts that remained to be collected asstated in the Petition before us, are (1) the 18% annual interest on

the redemption price and (2) the interest charge on Promissory NoteNo. 0142.

Because Tuble disputed the redemption price, he filed a Complaintfor recovery of a sum of money and damages before the RTC. He

specifically sought to collect P896,602.0210 representing the excesscharges on the redemption price. Additionally, he prayed for moral

and exemplary damages.

The RTC ruled in favor of Tuble. The trial court characterized the

redemption price as excessive and arbitrary, because the correctredemption price should not have included the above-mentioned

charges. Moral and exemplary damages were also awarded to him.

According to the trial court,11 the value of the car should not havebeen included, considering that the bank had already recovered theNissan Vanette. The obligations arising from the salary loan and carinsurance should have also been excluded, for there was no proofthat these debts existed. The interest and penalty charges should

have been deleted, too, because Promissory Note No. 0142 did notindicate any interest or penalty charges. Neither should litigation

expenses have been added, since there was no proof that the bankincurred those expenses.

As for the 18% annual interest on the bid price of P421,800, the RTCagreed with Tuble that this charge was unlawful. Act 313512 asamended, in relation to Section 28 of Rule 39 of the Rules ofCourt,13 only allows the mortgagee to charge an interest of 1% permonth if the foreclosed property is redeemed. Ultimately, under the

principle of solutio indebiti, the trial court required the refund ofthese amounts charged in excess of the correct redemption price.

On appeal, the CA affirmed the findings of the RTC.14 The appellatecourt only expounded the rule that, at the time of redemption, the

one who redeemed is liable to pay only 1% monthly interest plustaxes. Thus, the CA also concluded that there was practically no

basis to impose the additional charges.

Before this Court, petitioner reiterates its claims regarding theinclusion in the redemption price of the 18% annual interest on thebid price of P421,800 and the interest charges on Promissory Note

No. 0142. Petitioner emphasizes that an 18% interest rate allegedlyreferred to in the mortgage deed is the proper basis of the interest.

Pointing to the Real Estate Mortgage Contract, the bank highlightsthe blanket security clause or "dragnet clause" that purports tocover all obligations owed by Tuble:15

All obligations of the Borrower and/or Mortgagor, its renewal,

extension, amendment or novation irrespective of whether suchobligations as renewed, extended, amended or novated are in the

nature of new, separate or additional obligations;

All other obligations of the Borrower and/or Mortgagor in favor ofthe Mortgagee, executed before or after the execution of thisdocument whether presently owing or hereinafter incurred andwhether or not arising from or connection with the aforesaidloan/Credit accommodation; x x x.

Tubles obligations are defined in Promissory Note Nos. 0142 and0143. By way of recap, Promissory Note No. 0142 refers to the realestate loan; it does not contain any stipulation on interest. On theother hand, Promissory Note No. 0143 refers to the consumptionloan; it charges an 18% annual interest rate. Petitioner uses thislatter rate to impose an interest over the bid price of P421,800.


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Further, the bank sees the inclusion in the redemption price of an

addition 12% annual interest on Tubles real estate loan.

On top of these claims, the bank raises a new itemthe cars rentalfee to be included in the redemption price. In dealing with this

argument raised for the first time on certiorari, this Court dismissesthe contention based on the well-entrenched prohibition on raising

new issues, especially factual ones, on appeal.16

Thus, the pertinent issue in the instant appeal is whether or not the

bank is entitled to include these items in the redemption price: (1)the interest charges on Promissory Note No. 0142; and (2) the 18%

annual interest on the bid price of P421,800.

RULING OF THE COURT

The 18% Annual Interest on the BidPrice of P421,800

The Applicable Law

The bank argues that instead of referring to the Rules of Court tocompute the redemption price, the courts a quo should have appliedthe General Banking Law,17 considering that petitioner is a banking

institution.

The statute referred to requires that in the event of judicial orextrajudicial foreclosure of any mortgage on real estate that is usedas security for an obligation to any bank, banking institution, or

credit institution, the mortgagor can redeem the property by payingthe amount fixed by the court in the order of execution, withinterest thereon at the rate specified in the mortgage.18

Petitioner is correct. We have already established in Union Bank of

the Philippines v. Court of Appeals,19 citing Ponce de Leon v.Rehabilitation Finance Corporation20 and Sy v. Court of Appeals,21

that the General Banking Act being a special and subsequentlegislation has the effect of amending Section 6 of Act No. 3135,

insofar as the redemption price is concerned, when the mortgagee isa bank. Thus, the amount to be paid in redeeming the property isdetermined by the General Banking Act, and not by the Rules of

Court in Relation to Act 3135.

The Remedy of Foreclosure

In reviewing the banks additional charges on the redemption price

as a result of the foreclosure, this Court will first clarify certain vitalpoints of fact and law that both parties and the courts a quo seem to

have missed.

Firstly, at the time respondent resigned, which was chronologicallybefore the foreclosure proceedings, he had several liabilities to the

bank. Secondly, when the bank later on instituted the foreclosureproceedings, it foreclosed only the mortgage secured by the realestate loan of P421,800.22 It did not seek to include, in theforeclosure, the consumption loan under Promissory Note No. 0143or the other alleged obligations of respondent. Thirdly, on 28

February 1996, the bank availed itself of the remedy of foreclosureand, in doing so, effectively gained the property.

As a result of these established facts, one evident conclusionsurfaces: the Real Estate Mortgage Contract on the secured propertyis already extinguished.

In foreclosures, the mortgaged property is subjected to theproceedings for the satisfaction of the obligation.23 As a result,payment is effected by abnormal means whereby the debtor is

forced by a judicial proceeding to comply with the presentation or topay indemnity.24

Once the proceeds from the sale of the property are applied to the

payment of the obligation, the obligation is already extinguished.25Thus, in Spouses Romero v. Court of Appeals,26 we held that themortgage indebtedness was extinguished with the foreclosure and

sale of the mortgaged property, and that what remained was theright of redemption granted by law.

Consequently, since the Real Estate Mortgage Contract is alreadyextinguished, petitioner can no longer rely on it or invoke itsprovisions, including the dragnet clause stipulated therein. It followsthat the bank cannot refer to the 18% annual interest charged inPromissory Note No. 0143, an obligation allegedly covered by theterms of the Contract.

Neither can the bank use the consummated contract to collect on

the rest of the obligations, which were not included when it earlierinstituted the foreclosure proceedings. It cannot be allowed to usethe same security to collect on the other loans. To do so would be

akin to foreclosing an already foreclosed property.

Rather than relying on an expired contract, the bank should havecollected on the excluded loans by instituting the proper actions forrecovery of sums of money. Simply put, petitioner should have run

after Tuble separately, instead of hostaging the same property tocover all of his liabilities.

The Right of Redemption

Despite the extinguishment of the Real Estate Mortgage Contract,Tuble had the right to redeem the security by paying the redemption

price.

The right of redemption of foreclosed properties was a statutoryprivilege27 he enjoyed. Redemption is by force of law, and thepurchaser at public auction is bound to accept it.28 Thus, it is the

law that provides the terms of the right; the mortgagee cannotdictate them. The terms of this right, based on Section 47 of the

General Banking Law, are as follows:

1. The redemptioner shall have the right within one year after thesale of the real estate, to redeem the property.

2. The redemptioner shall pay the amount due under the mortgagedeed, with interest thereon at rate specified in the mortgage, and all

the costs and expenses incurred by the bank or institution from thesale and custody of said property less the income derived therefrom

3. In case of redemptioners who are considered by law as juridicalpersons, they shall have the right to redeem not after theregistration of the certificate of foreclosure sale with the applicableRegister of Deeds which in no case shall be more than three (3)

months after foreclosure, whichever is earlier.

Consequently, the bank cannot alter that right by imposingadditional charges and including other loans. Verily, the freedom tostipulate the terms and conditions of an agreement is limited bylaw.29


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Thus, we held in Rural Bank of San Mateo, Inc. v. IntermediateAppellate Court30 that the power to decide whether or not toforeclose is the prerogative of the mortgagee; however, once it has

made the decision by filing a petition with the sheriff, the acts of thelatter shall thereafter be governed by the provisions of the mortgage

laws, and not by the instructions of the mortgagee. In directcontravention of this ruling, though, the bank included numerous

charges and loans in the redemption price, which inexplicablyballooned to P1,318,401.91. On this error alone, the claims ofpetitioner covering all the additional charges should be denied.

Thus, considering the undue inclusions of the additional charges, thebank cannot impose the 18% annual interest on the redemption

price.

The Dragnet Clause

In any event, assuming that the Real Estate Mortgage Contractsubsists, we rule that the dragnet clause therein does not justify theimposition of an 18% annual interest on the redemption price.

This Court has recognized that, through a dragnet clause, a real

estate mortgage contract may exceptionally secure future loans oradvancements.31 But an obligation is not secured by a mortgage,unless, that mortgage comes fairly within the terms of the mortgage

contract.32

We have also emphasized that the mortgage agreement, being acontract of adhesion, is to be carefully scrutinized and strictlyconstrued against the bank, the party that prepared the

agreement.33

Here, after reviewing the entire deed, this Court finds that there isno specific mention of interest to be added in case of either defaultor redemption. The Real Estate Mortgage Contract itself is silent on

the computation of the redemption price. Although it refers to thePromissory Notes as constitutive of Tubles secured obligations, the

said contract does not state that the interest to be charged in caseof redemption should be what is specified in the Promissory Notes.

In Philippine Banking Communications v. Court of Appeals,34 wehave construed such silence or omission of additional charges

strictly against the bank. In that case, we affirmed the findings of thecourts a quo that penalties and charges are not due for want of

stipulation in the mortgage contract.

Worse, when petitioner invites us to look at the Promissory Notes indetermining the interest, these loan agreements offer differentinterest charges:

Cases in Credit Trans on MORTGAGE

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