G.R. No.

L-108638 March 11, 1994

Spouses RAMON R. NACU and LOURDES I. NACU, petitioners,
vs.
THE COURT OF APPEALS and PILIPINAS BANK, respondents.
Geofredo E. Mabunga and Froilan D. Cabaltera for petitioners.
Gella, Danguilan, Fuentes, Ferrer, Samson & Associates for private respondent.

NOCON, J.:
The pith of the issues in this petition is the question of whether or not the real estate mortgage undertaken by
Spouses Ramon R. Nacu and Lourdes Nacu, in favor of Home Construction Joint Venture was extended,
amplified or modified to cover the loan transaction of Ramon R. Nacu, in his capacity as one of the executive
officers of the Joint Venture of JBS Construction, Inc. and P.I. Construction and Services Co., Inc., by virtue
alone of the comprehensive provision in the mortgage contract that:
. . . it 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 as of the date thereof. . . . 1
Briefly, the facts established below show that petitionerse spouses are the registered owners of the subject
property covered by Transfer Certificate of Title No. 276891 of the Registry of Deeds for Quezon City, located
at 12 Yakan Street, La Vista Subdivision, Quezon City.
On July 12, 1982, respondent Pilipinas Bank extended to Home Construction-Joint venture, represented by
Horacio Mendoza, Julio Matias and Ramon Nacu, Irrevocable Stand-by LC No. 82/408-HO in the amount of
P4,400,000.00 to guarantee the ten per cent (10%) mobilization fund to be released by the Ministry of Public
Works and Highways in connection with a Lucana Fishing Port and Construction Project.
To secure this Home Construction-Joint Venture credit accommodation, petitioners spouses, together with
Spouses Horacio S. Mendoza and Leonisa D. Mendoza and Spouses Julio D. Matias and Lydia Sison
constituted real estate mortgages on five (5) distinct properties in favor of respondent Bank.
The subject deed of real estate mortgage dated June 7, 1982 executed by petitioner spouses, together with the
aforementioned co-mortgagors, provides, among other things, that the mortgage shall secure the payment of
the said loan and those others that the mortgagee may extend to the mortgagor including interest thereon and
expenses incurred incidental thereto and other obligations owing by the mortgagor to the mortgagee, whether
direct or indirect, principal or secondary as appearing in the accounts, books and records of the mortgagee.
In due time, the principal obligation mentioned in the said real estate mortgage extended to the Home
Construction Joint Venture was fully paid and extinguished.
Upon request, respondent Bank effected the cancellation/release of the titles subject of the said real estate
mortgage, particularly the properties of the co-mortgagors, Horacio Mendoza and Julio Matias.
Petitioners spouses did not immediately request for the issuance of the corresponding certificate of
cancellation/release of mortgage of TCT No. 276891 from respondent Bank.

On February 24, 1983, two (2) corporations under the Joint Venture JBS Construction, Inc., represented by
its president, Jose B. Sahagun and P.I. Construction and Services Co., Inc., represented by its president,
petitioner Nacu secured from respondent Bank, under letters of credit (L/C) Nos. 83/13786-HO and 83/13801HO, a loan accommodation for the importation of several pieces of construction machinery and equipment to
be used by said joint venture in a construction project, located at Mindanao.
In consideration of this JBS and PI Construction Joint Venture credit accommodation, Jose Sahagun and
petitioner Nacu executed in their capacities as executive officers thereof, a Continuing Security Agreement in
favor of respondent Bank. Said debtor corporations, represented by their respective presidents, were also
made to sign trust receipts in favor of respondent Bank.
Later, petitioner spouses requested from respondent Bank the issuance of the Certificate of
Cancellation/Release of the Real Estate Mortgage on TCT No. 276891. The respondent Bank refused despite
its admission that the Home Construction loan had been fully paid and despite the release of the properties of
the co-mortgagors, Horacio Mendoza and Julio Matias.
The demands in writing for the release of the questioned encumbrance were not heeded. Petitioners spouses
thereby decided to file an action against respondent bank before the Regional Trial Court of Quezon City
docketed as Civil Case No. 49233 for cancellation of the encumbrance on TCT No. 276891
After trial on the merits, the trial court, through Presiding Judge Ignacio L. Salvador, rendered its decision in
Civil Case No. 49233, the pertinent portions of which, are quoted herein:
. . . as correctly pointed out by the plaintiffs, this loan accommodation which was subsequently
contracted by J.B.S. Construction Corporation on April 19, 1983 and in which TCT 272689 is
allegedly made to answer is not duly annotated on said title. And it is fundamental that real
property constituted to secure an obligation by way of mortgage, must be registered and shall
take effect upon the title only from the time of registration. (Sec. 60, Act 496)
Furthermore co-plaintiff, Lourdes Nacu (co-owner of the property covered by TCT No. 276891)
was not privy to the subsequent transactions aforesaid.
Since the principal obligation covered by LC No. 82/408-HO in the amount of P4,400,000.00
had subsequently been fully paid and the obligation extinguised, as expressly admitted by
defendant bank the real estate mortgage is discharged, (Art. 2135) and consequently the
defendant bank may now be compelled to release . . . plaintiffs Transfer Certificate of Title No.
276891.
PREMISES CONSIDERED", judgment is hereby rendered in favor of the plaintiffs and against
the defendant, ordering said defendant bank to immediately release/discharge the second
encumbrance annotated on TCT No. 276891-Registry of Deeds of Quezon City and ordering
said defendant bank to pay plaintiffs attorney's fees in the amount of P5,000.00. 2
The respondent Bank appealed from the aforesaid decision of the trial court before respondent Court of
Appeals on June 15, 1990.
On October 28, 1992, respondent Court rendered its decision reversing the judgment of the trial court, the
pertinent portions stating, thus:
Everything considered, plaintiffs' property stands as continuing security for the subject credit
accommodations guaranteed by plaintiff Ramon Nacu, and the mortgage lien thereon cannot be
discharged until these obligations are fully settled.

WHEREFORE, judgment is hereby rendered reversing the appealed decision and dismissing
the complaint. Costs against appellees. 3
On November 18, 1992, petitioner spouses seasonably filed a motion for reconsideration of the said assailed
decision.
On January 25, 1993, respondent Court promulgated its resolution denying petitioner spouses' motion for
reconsideration. Hence, this instant petition of petitioners spouses assigning the following as errors:
A
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT
PETITIONERS SPOUSES' LA VISTA PROPERTY WAS ENCUMBERED AS SECURITY NOT
ONLY FOR THE (1982) HOME CONSTRUCTION LOAN, BUT ALSO FOR THE (1983) JBS
AND PIC JOINT VENTURE LOAN;
B
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT JBS
CONSTRUCTION, INC. IS THE ONLY DEBTOR CORPORATION, AND AS SUCH, IT COULD
NOT HAVE SIMULTANEOUSLY ASSUMED THE ROLE OF A SURETY/GUARANTOR OF THE
LOAN OBLIGATION WHICH ITSELF CONTRACTED;
C
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT EXHIBIT
"C"; "5"; "9"; AND, "10" CLEARLY REVEAL THAT PETITIONER RAMON NACU SIGNED SAID
DOCUMENTS IN HIS PERSONAL CAPACITY AND NOT AS A REPRESENTATIVE OR
EXECUTIVE OFFICER OF THE DEBTOR CORPORATIONS;
D
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN GIVING WEIGHT AND
CREDENCE TO EXHIBIT "4"; MINUTES OF THE MEETING OF RESPONDENT BANK'S
BOARD OF DIRECTORS AND THE REPORT SUBMITTED BY THE BANK'S PRESIDENT
PERTAINING TO THE APPLICATION FOR LETTERS OF CREDIT BY THE DEBTOR
CORPORATIONS SHOWING THAT A SECOND REAL ESTATE MORTGAGE ON
PETITIONERS' LA VISTA PROPERTY WAS INTENDED TO SECURE SAID (1983) JBS AND
PIC JOINT VENTURE OBLIGATION;
E
RESPONDENT HONORABLE COURT OF APPEALS ERRED IN NOT SUSTAINING THE
TRIAL COURTS DECISION THAT PETITIONERS SPOUSES ARE NOT PRIVY TO THE
SUBSEQUENT TRANSACTIONS, PARTICULARLY THE CONTRACTS ENTERED INTO BY
(1983) JBS-PIC CONSTRUCTION JOINT VENTURE, THE DEBTOR CORPORATIONS (JBS
AND PIC) BEING SEPARATE AND DISTINCT JURIDICAL PERSONALITIES FROM
PETITIONERS SPOUSES;
F

RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT PETITIONER

RAMON NACU SIGNED THE CONTINUING SURETY AGREEMENT AND TRUST RECEIPTS
IN HIS PERSONAL CAPACITY;
G
RESPONDENT HONORABLE COURT ERRED IN FINDING THAT THE (1983) JBS-PIC JOINT
VENTURE BOUND THE JUNE 7, 1982 REAL ESTATE MORTGAGE DESPITE THE FACT
THAT PETITIONER LOURDES NACU DID NOT GIVE HER CONSENT THERETO;
H
RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THERE WAS
NO NEED TO ANNOTATE THE JULY 1983 LOAN ACCOMMODATION ALLEGEDLY
GUARANTEED BY PETITIONER RAMON NACU ON TCT NO. 276891 SINCE THE SAME
HAVE BEEN EXPRESSLY COVERED BY THE MORTGAGE CONTRACT; AND,
I
RESPONDENT HONORABLE COURT OF APPEALS ERRED AND ACTED IN GRAVE ABUSE
OF DISCRETION WHEN IT "CREATED" AN OBLIGATION ON THE PART OF PETITIONERS
WHERE NONE EXISTED. 4
Arising from the foregoing assignments of errors are the following issues:
1) Whether or not the (1983) JBS and PIC JOINT VENTURE loan transaction is another direct
or indirect, principal or secondary obligation owing by the MORTGAGOR (HOME
CONSTRUCTION JOINT VENTURE to the MORTGAGEE (RESPONDENT BANK);
2) Whether or not the 1983 LOAN DOCUMENTS, Surety Agreement and Trust Receipts were
executed by Petitioner Ramon Nacu in his personal capacity or in behalf of a corporate entity;
3) Whether or not the TRUST RECEIPT is an extension of the Real Estate Mortgage dated June
7, 1982;
4) Whether or not the JBS CONSTRUCTION, INC. is the only DEBTOR CORPORATION in the
1983 loan transaction, and as such, it could not have simultaneously assumed the role of a
surety/guarantor of the loan obligation which itself contracted;
5) Whether or not weight and credence to Exhibit "4", the minutes of the meeting of Respondent
Bank's Board of Directors and the Report submitted by the bank's president pertaining to the
application for letters of credit by the debtor corporation, showing that a second real estate
mortgage on Petitioners' La Vista property was intended to secure said obligation, could be
given evidentiary weight and credence;
6) Whether or not the July 1983 loan accommodation allegedly guaranteed by Petitioner Ramon
Nacu should have been annotated on Petitioners' TCT to bind their subject property;
7) Whether or not the want of Petitioner Lourdes Nacu's consent in the 1983 loan agreements
signed by Petitioner Ramon Nacu renders the same voidable;

8) Whether or not Petitioner Spouses are privy to the 1983 loan transactions entered into by
JBS-PI CONSTRUCTION JOINT VENTURE, the debtor corporations being separate and
distinct juridical personalities from that of Spouses Petitioner; and,
9) Whether or not the ambiguity in the interpretation of the intention of the parties in the case at
bar should be resolved in favor of the Petitioners Spouses. 5
The assailed decision of respondent Court held that in view of the provisions of the real estate mortgage more
particularly that which provides that the real estate mortgage secures ". . . other obligations owing by the
Mortgagor to the Mortgagee, whether direct or indirect, principal or secondary, as appearing in the accounts,
books and records of the Mortgagee," the bank may legally refuse to release the second mortgage on TCT No.
276891 considering that the same was used as security for another loan accommodation extended to P.I.
Construction and Services Co., Inc., headed by plaintiff Ramon R. Nacu, and J.B.S. Construction, Inc., headed
by Jose B. Sahagun, a joint venture.
True, the real estate mortgage categorically provides that it 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
that the 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.
However, the July 12, 1982 Home Construction loan transaction and the February 24, 1983 JBS and P.I.
Construction Joint Venture loan transaction are totally alien to each other. Noteworthy is the fact that the
1982 loan transaction was extended to Home Construction Joint Venture, represented by Spouses Horacio
S. Mendoza and Leonisia D. Mendoza; Spouses Julio D. Matias and Lydia Sison and Spouses Ramon R.
Nacu and Lourdes I. Nacu. On the other hand, the 1983 loan transaction was applied for and extended to the
Joint Venture-JBS Construction, Inc., represented by its president, Ramon Nacu.
Clearly, the two (2) loan transaction involved different sets of parties. While it is true that petitioner Nacu is a
party in both transactions, he acted in totally different capacities.
Thus, we find the findings of facts of the trial court accurate as they are positively supported by documentary
evidence, to wit:
. . . A carefully reading of the Continuing Surety Agreement (Exhibit "5") will reveal the fact that
plaintiff Ramon R. Nacu, and Jose B. Sahagun signed said Continuing Surety Agreement in
their capacities as Executive Officer of the J.B.S. Construction Corporation. It is therefore the
J.B.S. Construction Corporation that is the Surety. The plaintiff Ramon N. Nacu, and/or Jose B.
Sahagun cannot be made answerable for the liability or obligation or the corporation. If at all
said Ramon R. Nacu and Jose B. Sahagun can be liable only to the extent of their stocks in the
corporation. In other words, this contract (Exhibit "5") entered into by J.B.S. Construction
Corporation with defendant bank is a distinct contract and cannot in any way be related to the
provisions of the Real Estate Mortgage (Exhibit "C" and Exhibit "6") because the parties thereto
are different. 6
To allow the 1982 mortgage contract to be amplified to include the 1983 Continuing Surety Agreement would
be stretching too far the former contract's extent. Interpreting the same as respondent Bank would want us to
do would make the provision too comprehensive and all-encompassing as to amount to absurdity.
Besides, there is nothing in the loan accommodation subsequently contracted that TCT 276891 is mortgaged.
Said loan was not even duly annotated on said title. Under Section 60 of Act No. 496, a mortgage deed and all
instruments assigning discharging and otherwise dealing with the mortgage are required to be registered.
Without registration, they cannot have any effect on the title.

The respondent Court in reversing the decision of the trial court, linked the trust receipts, signed by petitioner
Nacu, together with Jose Sahagun, with the real estate mortgage dated June 7, 1982 by finding that under the
express terms of the trust receipts in favor of respondent Bank, petitioner Nacu again bound himself "jointly
and severally" with the Trustees (JBS Corporation and PI Construction) for the value of the goods covered by
the instruments.
Rather than support the position of respondent Bank, the trust receipt agreement shows that the 1982 real
estate mortgage is no longer operative because otherwise, there would have been no need for the execution of
said trust agreement to secure the second loan.
Under pertinent laws, the trust receipt is a separate and independent security transaction intended to aid in
financing importers whereby the imported goods are held as security by the lending institution for the loan
obligation.
In the case and Vintola v. Insular bank of Asia and America 7 this Court explained the nature and usage of trust
receipts as follows:
. . . A letter of credit-trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the
trust receipt as a security for the loan. In other words, the transaction involved a loan feature
represented by the letter of credit, and security feature which is in the covering trust receipt. . . .
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a security
interest in the goods. It secures an indebtedness and there can be no such thing as security
interest that secures no obligation.
. . . A trust receipt is considered as a security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or resources to finance the importation or
purchase or merchandise, and who may not be able to acquire credit except through utilization,
as collateral, of the merchandise imported or purchased. . . .
Moreover, by virtue of the trust receipt agreement, respondent Bank should proceed against the same because
the trust receipt theoretically transferred the ownership of the imported personal property to respondent Bank.
Worth mentioning is also the fact that the trust receipts and the Continuing Surety Agreement were signed only
by petitioner Nacu. Assuming that both documents duly constituted a real estate mortgage on the property of
petitioners spouses, they are voidable for want of petitioner Lourdes Nacu's acquiescence and/or consent
thereto. Article 166 of the Civil Code, the law then applicable, provides that unless the wife has been declared
a non compos mentis, a spendthrift, is under civil interdiction or is confined in a leprosarium, the husband
cannot alienate or encumber any real property of the conjugal partnership without the wife's consent.
In resolving in favor of respondent Bank, respondent Court likewise appreciated the weight of Exhibit "4," the
purported minutes of the meeting of respondent Bank's Board of Directors and Report pertaining to the
application for letters of credit by the JBS and P.I. Construction Joint Venture. In giving evidentiary weight
thereto, the decision of respondent Court said:
Still another important consideration negates the trial court's finding that plaintiffs' property could
not be held as continuing security for the obligations of the debtor corporation. The minutes of
the meeting of defendant bank's Board of Directors (Exhibit 4) and the report submitted by the
bank's president pertaining to the application for letters of credit by the debtor corporation show
that a second real estate mortgage on plaintiffs' La Vista property was intended to secure such
obligation. From the evidence adduced, there is ample basis to hold plaintiff Ramon Nacu liable

as surety for the accommodation extended to the debtor corporation, and consequently gives
defendant bank reason to hold on to the subject mortgaged property until the obligations are
fully settled. 8
However, petitioner spouses were not privy to Exhibit "4" as these documents are internal to respondent Bank.
Whether or not they gave their consent thereto cannot be ascertained.
Finally, if the parties intended the 1982 real estate mortgage to apply to the 1983 loan transaction, respondent
Bank should have required petitioners spouses to execute the proper loan documents clearly and categorically
constituting upon the same property a real estate mortgage. The respondent Bank failed in this regard and
must therefore suffer the consequences. In Orient Air Services and Hotel Representatives v. Court of
Appeals, 9 this Court upheld the doctrine that any ambiguity in a contract whose terms are susceptible of
different interpretation, must be read against the party who drafted it.
Indisputably, respondent Bank was the party responsible for the preparation of the, 1982 and 1983 loan
agreement which are contracts of adhesion. Consequently, any ambiguity in the loan agreement should be
construed against it on the assumption that it could have avoided it by the exercise of a little more care.
More emphatic and appropriate is our pronouncement in La Insular v. Machuca Go Tanco, et al. 10 where we
held:
It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and
the rule is settled that the obligation of the surety cannot be extended by implication beyond
specified limits.
It is crystal clear from the foregoing that respondent Bank's actuation in refusing to cancel the encumbrance
annotated on petitioners spouses' Transfer Certificate of Title on the ground that the latter's property is still
liable for an unpaid loan obligation of J.B.S. Construction, Inc. and P.I. Construction and Services Co., Inc. was
a clever attempt to extend by implication, beyond the terms of the real estate mortgage contract, the latter's
force and effect. Respondent Bank should not be allowed to take this "short-cut" to collect an indebtedness
due it. Principles of fair play demand that it should not resort to the expedience of enforcing a real estate
mortgage when there is none duly constituted.
WHEREFORE, the petition is GRANTED. The assailed decision of the respondent Court of Appeals in CAG.R. No. CV 276693 is hereby REVERSED and the decision of the trial court in Civil Case No. Q-49223
ordering, among other things, respondent Pilipinas Bank to release and/or discharge the encumbrance on
Transfer Certificate of Title No. 276891 of the Registry of Deeds of Quezon City is hereby REINSTATED in
toto.
SO ORDERED.

THIRD DIVISION
Spouses RODRIGO
PADERES ,
Petitioners,
- versus -

PADERES

and

SONIA

G. R. No. 147074
Present:
PANGANIBAN, J., Chairman,
SANDOVAL-GUTIERREZ,

The Hon. COURT OF APPEALS,[1]Hon. CARLOTA

P. VALENZUELA, in her capacity as the Liquidator
of Banco Filipino Savings and Mortgage Bank,[2]
Respondents.

CORONA,
CARPIO MORALES,
GARCIA, JJ.

x---------------------------------------------x
Spouses ISABELO BERGARDO and JUANA
HERMINIA BERGARDO,
Petitioners,

G. R. No. 147075

- versus The Hon. COURT OF APPEALS,1Hon. CARLOTA

P. VALENZUELA, in her capacity as the Liquidator
of Banco Filipino Savings and Mortgage Bank,2
Respondents.

Promulgated:
July 15, 2005

xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xx

DECISION

CARPIO MORALES, J.:

By their Petition for review on certiorari under Rule 45 of the Rules of Court, petitioners spouses Rodrigo and Sonia Paderes
and spouses Isabelo and Juana Bergado seek the reversal of the September 20, 2000 Decision [3] and February 16, 2001 Resolution of
the Court of Appeals, which dismissed their original Petition and denied their Motion for Reconsideration, respectively.
On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate mortgage [4] over 21
registered parcels of land including the improvements thereon in favor of Banco Filipino Savings and Mortgage Bank (Banco Filipino)
in order to secure a loan of P1,885,000.00. The mortgage was registered with the Registry of Deeds of Pasay City and annotated on
the corresponding transfer certificates of title (TCTs) covering the properties on December 17, 1982.[5]
The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with an area of 263, both
located in the then Municipality of Paraaque (now Paraaque City) covered by TCT Nos. 61062[6] and 61078,[7] respectively.
Subsequently or in August 1983, MICC sold the lot[8] covered by TCT No. 61078, together with the house [9] thereon, to the
petitioners in the first case, the Paderes spouses. And on January 9, 1984, MICC sold the house [10] built on the lot covered by TCT No.
61062 to the petitioners in the second case, the Bergado spouses. Neither sale was registered, however.[11]
On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified Petition [12] for the
extrajudicial foreclosure of MICCs mortgage. At the auction sale of the foreclosed properties on March 25, 1985, Banco Filipino
submitted a bid of P3,092,547.82 and was declared the highest bidder. A Certificate of Sale [13] was issued in its favor which was
registered with the Registry of Deeds and annotated on the corresponding TCTs covering the mortgaged properties on July 29, 1985.

No redemption of the foreclosed mortgage having been made within the reglementary period, Carlota P. Valenzuela, the then
Liquidator of Banco Filipino, filed on October 16, 1987 an ex parte Petition[14] for the issuance of a Writ of Possession of the
foreclosed properties with the Regional Trial Court (RTC) of Makati. After hearing, the Petition was granted by Order dated
September 8, 1988[15] of Branch 59 of the RTC.
On November 7, 1996, copies of the Writ of Possession dated November 5, 1996, together with a notice addressed to MICC
and/or All persons claiming rights under them to voluntarily vacate the premises within 7 days from receipt thereof, were served on
petitioners.[16]
Instead of vacating the two lots, however, petitioners filed separate petitions before the Court of Appeals, docketed as C.A.
G.R. Numbers 42470 and 42471 which were later consolidated,[17] assailing the validity of the Writ of Possession.
On September 20, 2000, the Court of Appeals promulgated its questioned Decision [18] dismissing the consolidated petitions
for lack of merit and upholding the validity of the Writ of Possession.
Petitioners Motion for Reconsideration of the appellate courts decision having been denied by Resolution of February 16,
2001, they jointly come before this Court arguing that: (1) having purchased their respective properties in good faith from MICC, they
are third parties whose right thereto are superior to that of Banco Filipino; (2) they are still entitled to redeem the properties and in fact
a binding agreement between them and the bank had been reached; (3) their respective houses should not have been included in the
auction sale of the mortgaged properties; (4) on the contrary, as builders in good faith, they are entitled to the benefits of Article 448 of
the

Civil

Code;

and (5) the writ of possession issued by the RTC in 1996 had already lost its validity and efficacy.
The petition must be denied.
In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an order commanding the
sheriff to place a person in possession of the foreclosed property, [19] is governed by Section 7 of Act No. 3135 (AN ACT TO
REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL ESTATE
MORTGAGES), as amended:
Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of
the province or place where the property or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an
ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in
the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the
Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any
register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of
such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered
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.

That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took place after MICCs
mortgage to Banco Filipino had been registered in accordance with Article 2125 [20] of the Civil Code and the provisions of P.D. 1529
(PROPERTY REGISTRY DECREE).[21] As such, under Articles 1312[22] and 2126[23] of the Civil Code, a real right or lien in favor of
Banco Filipino had already been established, subsisting over the properties until the discharge of the principal obligation, whoever the
possessor(s) of the land might be.
In rejecting a similar argument, this Court, in Philippine National Bank v. Mallorca,[24] ratiocinated:
1. Appellants stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained
unaffected by the foreclosure and subsequent sale to PNB, and she neither secured nor contracted a loan with said
bank. What PNB foreclosed, she maintains, was that portion belonging to Ruperta Lavilles only, not the part
belonging to her.
Appellants position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a mortgage
directly and immediately subjects the property on which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted. Sale or transfer cannot affect or release the
mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is
subjected the purchased thing and which is at the disposal of the creditor in order that he, under the terms of
the contract, may recover the amount of his credit therefrom. For, a recorded real estate mortgage is a
right in rem, a lien on the property whoever its owner may be. Because the personality of the owner is
disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much
of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the
mortgagee. So it is, that a mortgage lien is inseperable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the transfer to them be with or without the consent of
the mortgagee. For, the mortgage, until discharge, follows the property.[25] (Emphasis and underscoring supplied;
italics in the original; citations omitted)

And in Roxas v. Buan[26] this Court held:

Contending that petitioner Roxas is a party actually holding the property adversely to the debtor, Arcadio
Valentin, petitioners argue that under the provisions of Act No. 3135 they cannot be ordered to vacate the property.
Hence, the question of whether, under the circumstances, petitioner Roxas indeed is a party actually holding the
property adversely to Valentin.
It will be recalled that Roxas' possession of the property was premised on its alleged sale to him by
Valentin for the amount of P100,000.00. Assuming this to be true, it is readily apparent that Roxas holds title
to and possesses the property as Valentin's transferee. Any right he has to the property is necessarily derived
from that of Valentin. As transferee, he steps into the latter's shoes. Thus, in the instant case, considering that
the property had already been sold at public auction pursuant to an extrajudicial foreclosure, the only interest
that may be transferred by Valentin to Roxas is the right to redeem it within the period prescribed by law. Roxas is
therefore the successor-in-interest of Valentin, to whom the latter had conveyed his interest in the property
for the purpose of redemption [Rule 39, Sec. 29 (a) of the Revised Rules of Court; Magno v. Viola, 61 Phil. 80
(1934); Rosete v. Prov. Sheriff of Zambales, 95 Phil. 560 (1954).] Consequently, Roxas' occupancy of the
property cannot be considered adverse to Valentin.
Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that where the purchaser in an execution
sale has already received the definitive deed of sale, he becomes the owner of the property bought and, as absolute
owner, he is entitled to its possession and cannot be excluded therefrom by one who merely claims to be a
successor-in-interest of the judgment debtor, unless it is adjudged that the alleged successor has a better right to the
property than the purchaser at the execution sale. Stated differently, the purchaser's right of possession is
recognized only as against the judgment debtor and his successor-in-interest but not against persons whose
right of possession is adverse to the latter. The rule was reiterated in Guevara v. Ramos [G.R. No. L-24358,
March 31, 1971, 38 SCRA 194].
The rule in Belleza, although relating to the possession of property sold in execution sales under what is
now Sec. 35, Rule 39 of the Revised Rules of Court, is also applicable to the possession of property sold at

extrajudicial foreclosure sales pursuant to Sec. 6 of Act No. 3135 [see IFC Service Leasing and Acceptance Corp. v.
Nera, supra]. Thus, as petitioner Roxas is not a party holding the property adversely to Valentin, being the
latter's successor-in-interest, there was no bar to the respondent trial court's issuance of a writ of possession
upon private respondent Buan's application.
It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he merely
stepped into the shoes of Valentin, being the latter's successor-in-interest. On the other hand, petitioner de Guia was
occupying the house as Roxas' alleged tenant [Rollo, p. 24]. Moreover, respondent court's decision granting private
respondent Buan's petition for the issuance of a writ of possession ordered the Provincial Sheriff of Zambales or any
of his deputies to remove Valentin or any person claiming interest under him from the property [Rollo, p. 16].
Undeniably, petitioners fell under this category.[27] (Emphasis supplied)
As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to acknowledge and
respect the mortgage it had earlier executed in favor of Banco Filipino.
As for petitioners argument that they are still entitled to redeem the foreclosed properties, it must be rejected too.
The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year from the date of
registration of the Certificate of Sale with the Registry of Deeds, a right to redeem the foreclosed mortgage, [28] hence, petitioners, as
MICCs successors-in-interest, had one year from the registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for
the purpose.
Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor of Banco Filipino,
[29]

and TCT Nos. 112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No. 61062) were issued in its name.
As this Court held in F. David Enterprises v. Insular Bank of Asia and America:[30]
It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is
not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the
possession of the said property and can demand it at any time following the consolidation of ownership in his
name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of
the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act
No. 3135 as amended. No such bond is required after the redemption period if the property is not
redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon
proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the
court.[31] (Emphasis supplied)
Petitioners assert, however, that a binding agreement for the repurchase of the subject properties was reached with Banco

Filipino as, so they claim, reflected in the following exchange of communications:

October 17, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa Sts.
Makati City
Dear Madam:
I am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re: TCT No. 61078 formerly owned by Manila
International Construction Corporation (MICC for short) now TCT No. 112352, registered in the name of Banco

Filipino Savings and Mortgage Bank in July 30, 1996 at the Register of Deeds of Paraaque, Metro Manila.
Incidentally, the property is denominated as Block 48, Lot 5 located at Leon Florentino St., BF Executive ,
Paraaque, Metro Manila.
The background facts of TCT No. 61078 are as follows:
In August 1983, the MICC executed a Deed of Absolute Sale of that lot covered by TCT No. 61078 in favor of
spouses Sonia and Rodrigo Paderes which was acknowledged before a Notary Public on October 1, 1983. The value
of the lot was P115,720.00. In the same year, the parties executed an addendum to the said deed of absolute sale
which covered a house valued atP242,874.45. The net package price of the house and lot was fixed at P329,405.75.
From this amount, the spouses Sonia and Rodrigo Paderes paid MICC inclusive of equity the amount ofP125,437.35
leaving a balance of P212,985.60. The spouses moved in the house in November 1983.
Unknown to the spouses, MICC mortgaged TCT No. 61078 in favor of Banco Filipino Savings and Mortgage Bank
for P1,885.00 duly inscribed in TCT No. 112352 on December 12, 1982. It was foreclosed by the bank
for P3,092,547.82 pursuant to the certificate of sale executed by the sheriff as inscribed on TCT No. 112352 [should
be TCT No. 61078] on July 29, 1985 . . .
Then came the news that Banco Filipino Savings and Mortgage Bank was under conservatorship by the Board of
Liquidators. On the other hand, MICC became bankrupt and closed shop. The spouses were [sic] nowhere to go to
then at the time to get the title of the property they purchased from MICC.
Until, the spouses received a letter dated April 6, 1987 from the Board of Liquidators via Alberto Reyes, Deputy
Liquidator, informing the spouses that the property they purchased from MICC was already foreclosed by the bank.
The spouses answered the letter and disclaimed any knowledge of the foreclosure. In their answer to the said letter,
they emphasized that their unpaid balance with MICC was P188,985.60.
We are addressing your goodself [sic] to inform the bank that the spouses Sonia and Rodrigo Paderes are
exercising their right of redemption as subrogees of the defunct MICC under special laws.
From reliable information, the bank had already made appraisal of the property and from that end, may we
be informed [at] the soonest possible time the value of the property to enable the spouses to prepare for such
eventuality. And, upon receipt of the said appraisal value we shall immediately inform you [of] our position
on the matter.
Thank you very much.
Very truly yours,
[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[32]
x x x (Emphasis supplied).

October 25, 1996

Mr. Luciano D. Valencia
Counsel for Sps. Paderes
JPA Subdivision, Muntinlupa
Dear Sir:
This is with regard to your letter dated October 17, 1996 concerning the property formerly owned by Manila
International Construction Corporation (MICC) foreclosed by the Bank.

Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to discuss said foreclosed property directly
with the bank.
Thank you.
Very truly yours,
[SGD.]
LUZ B. DACASIN
Assistant Vice-President
Real Estate Department[33]
x x x (Emphasis supplied; italics in the original).
November 4, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept., Banco Filipino
Makati City
Dear Madam:
Thank you very much for your letter dated October 25, 1996, which was received on October 31, 1996, the contents
of which had been duly noted. Pursuant thereto I advised my clients spouses Rodrigo and Sonia Paderes to see
[you].

With your indulgence, I also advised my other clients spouses Isabelo and Juana Herminia Bergado to go along with
the spouses Paderes, who are similarly situated with spouses Paderes property.
Incidentally, on October 28, 1996, I also wrote your goodself another letter at the behest of spouses Isabelo and
Juana Herminia Bergado whose property is equally footed with spouses Paderes.
It is hoped that, out of that conference per your invitation my clients above-named be informed formally the total
amounts due the bank as a consequence of the right of redemption extended to them. Of course, whatever
appraised value arrived at by the bank on the properties subject of redemption the same shall not be
construed as my clients committed liability.
Thank you very much.
Very truly yours,
[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[34]
x x x (Emphasis supplied).
November 8, 1996
Mrs. LUZ B. DACASIN
Asst. Vice-President
Real Estate Department
Banco Filipino Savings & Mortgage Bank
Makati City

Re: Lot 18, Block 48 Gamboa St.

BF Homes, Paraaque, MM (264 SQ.M.)
Occupied by Sps. Isabelo Bergado &
Juana Herminia Bergado
Lot 5, Block 48, L. Florentino St.
BF Homes, Paraaque, MM (263 SQ.M.)
Occupied by Sps. Rodrigo Paderes &
Sonia Paderes
Dear Madam Asst. Vice-President:
Pursuant to our conference this morning November 8, 1996, regarding our desire to redeem the properties abovecaptioned, which your good office accommodated, and per your advi[c]e, we submit the following facts taken out
and our proposals:
1. Regarding the lot, you mentioned that, the cost per square meter was P7,500.00. To this price we are nocommittal for the said price is high. Although, we are still to have the amount re-negotiated.
2. We appreciate very much your having excluded the house built in the said lot for purposes of fixing the
redemption price.
3. Your advi[c]e to subject the properties (house and lot) to a real-estate mortgage with the bank so that the
amount to be loaned will be used as payment of the properties to be redeemed is accepted, and we are
committed to it.
Thank you very much
Very truly yours,
[SGD.]
SPS. SONIA &
RODRIGO PADERES
[SGD.]
SPS. ISABELO &
JUANA HERMINIA BERGADO[35]
(Emphasis supplied).
Petitioners assertion does not pass muster.
Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to give rise to a binding
contract: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the
obligation which is established. Consent is further defined in Article 1319 of the Code as follows:
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered into in the place where the offer was made. (Emphasis
supplied)
By offer is meant a unilateral proposition which one party makes to the other for the celebration of the contract. There is an
offer in the context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any
further act on the part of the offeror. Hence, the offer must be definite, complete and intentional. [36]

With regard to the acceptance, a learned authority notes that:

To produce a contract, the acceptance must not qualify the terms of the offer. There is no acceptance sufficient
to produce consent, when a condition in the offer is removed, or a pure offer is accepted with a condition, or when a
term is established, or changed, in the acceptance, or when a simple obligation is converted by the acceptance into
an alternative one; in other words, when something is desired which is not exactly what is proposed in the offer. It is
necessary that the acceptance be unequivocal and unconditional, and the acceptance and the proposition
shall be without any variation whatsoever; and any modification or variation from the terms of the offer
annuls the latter and frees the offeror.[37] (Emphasis supplied)
A reading of the above-quoted correspondence reveals the absence of both a definite offer and an absolute acceptance of any
definite offer by any of the parties.
The letters dated October 17, 1996 and November 4, 1996, signed by petitioners counsel, while ostensibly proposing to
redeem the foreclosed properties and requesting Banco Filipino to suggest a price for their repurchase, made it clear that any proposal
by the bank would be subject to further action on the part of petitioners.
The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of Banco Filipino, merely invited
petitioners to engage in further negotiations and does not contain a recognition of petitioners claimed right of redemption or a definite
offer to sell the subject properties back to them.
Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to subject the properties
(house and lot) to a real-estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be
redeemed. It is clear from item no. 1 of the same letter, however, that petitioners did not accept Banco Filipinos valuation of the
properties at P7,500.00 per square meter and intended to have the amount [renegotiated].
Moreover, while purporting to be a memorandum of the matters taken up in the conference between petitioners and Banco
Filipino Vice-President Dacasin, petitioners letter of November 8, 1996 does not contain the concurrence of Ms. Dacasin or any other
authorized agent of Banco Filipino. Where the alleged contract document was signed by only one party and the record shows that the
other party did not execute or sign the same, there is no perfected contract.[38]
The Court of Appeals, therefore, committed no error in concluding that nothing concrete came out of the meeting between
petitioners and Banco Filipino.
Respecting petitioners claim that their houses should have been excluded from the auction sale of the mortgaged properties, it
does not lie. The provision of Article 448 [39]of the Civil Code, cited by petitioners, which pertain to those who, in good faith,
mistakenly build, plant or sow on the land of another, has no application to the case at bar.
Here, the record clearly shows that petitioners purchased their respective houses from MICC, as evidenced by the Addendum
to Deed of Sale dated October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984.

Being improvements on the subject properties constructed by mortgagor MICC, there is no question that they were also
covered by MICCs real estate mortgage following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code:
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or
income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to
the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person. (Underscoring supplied).
The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.[40] is illustrative. In that case, this Court held:
. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is built but also the
buildings, machinery, and accessories installed at the time the mortgage was constituted as well as all the
buildings, machinery and accessories belonging to the mortgagor, installed after the constitution
thereof (Bischoff vs. Pomar and Compaia General de Tabacos, 12 Phil. 690); (2) that the notice announcing the sale
at public auction of all the properties of a sugar central extends to the machinery and accessories acquired and
installed in its mill after the constitution of the mortgage; (3) that the court, that has ordered the placing of the
mortgaged properties in the hands of a receiver in a foreclosure suit, has jurisdiction to order the sale at public
auction of the said mortgaged properties even before the termination of the receivership; and (4) that the fact that
the price at which the mortgaged properties were sold at public auction is inadequate, is not in itself sufficient to
justify the annulment of the sale.[41] (Emphasis supplied)
Petitioners finally proffer that the issuance, on Banco Filipinos mere motion, of the Writ of Possession on November 5, 1996,
more than 8 years since the promulgation of the RTC Order granting its petition on September 8, 1988, violated Section 6, Rule 39 of
the Rules of Court, viz:
Sec. 6. Execution by motion or by independent action. A final and executory judgment or order may be executed on
motion within five (5) years from the date of its entry. After the lapse of such time, and before it is barred by the
statute of limitations, a judgment may be enforced by action. The revived judgment may also be enforced by motion
within five (5) years from the date of its entry and thereafter by action before it is barred by the statute of
limitations.
Hence, petitioners argue, the writ of possession had lost its validity and efficacy and should therefore be declared null and void.
Petitioners ultimate argument fails too. In Rodil vs. Benedicto,[42] this Court categorically held that the right of the applicant or a
subsequent purchaser to request for the issuance of a writ of possession of the land never prescribes:
The respondents claim that the petition for the issuance of a writ of possession was filed out of time, the said
petition having been filed more than five years after the issuance of the final decree of registration. In support of
their contention, the respondents cite the case of Sorogon vs. Makalintal [80 Phil. 259 (1948)], wherein the
following was stated:
"It is the law and well settled doctrine in this jurisdiction that a writ of possession must be issued within the
same period of time in which a judgment in ordinary civil actions may be summarily executed (section 17,
Act 496, as amended), upon the petition of the registered owner or his successors in interest and against all
parties who claim a right to or interest in the land registered prior to the registration proceeding."

The better rule, however, is that enunciated in the case of Manlapas and Tolentino vs. Lorente [48 Phil. 298
(1925)], which has not yet been abandoned, that the right of the applicant or a subsequent purchaser to ask for
the issuance of a writ of possession of the land never prescribes. . .

xxx
In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also ruled that the provision in the Rules of
Court to the effect that judgment may be enforced within five years by motion, and after five years but
within ten years by an action (Section 6, Rule 39) refers to civil actions and is not applicable to special
proceedings, such as land registration cases. The Court said:
"The second assignment of error is as follows:
'That the lower court erred in ordering that the decision rendered in this land registration case on
November 28, 1931 or twenty six years ago, has not yet become final and unenforceable.
We fail to understand the arguments of the appellant in support of the above assignment, except in so far as
it supports his theory that after a decision in a land registration case has become final, it may not be
enforced after the lapse of a period of 10 years, except by another proceeding to enforce the judgment or
decision. Authority for this theory is the provision in the Rules of Court to the effect that judgment may be
enforced within 5 years by motion, and after five years but within 10 years, by an action (Sec. 6, Rule
39). This provision of the Rules refers to civil actions and is not applicable to special proceedings,
such as a land registration case. This is so because a party in a civil action must immediately enforce
a judgment that is secured as against the adverse party, and his failure to act to enforce the same
within a reasonable time as provided in the Rules makes the decision unenforceable against the
losing party. In special proceedings the purpose is to establish a status, condition or fact; in land
registration proceedings, the ownership by a person or a parcel of land is sought to be
established. After the ownership has been proved and confirmed by judicial declaration, no further
proceeding
to
enforce
said
ownership
is
necessary, except when the adverse or losing party had been in possession of the land and the
winning party desires to oust him therefrom.[43] (Emphasis and underscoring supplied)

Petitioners have not supplied any cogent reason for this Court to deviate from the foregoing ruling.
The established doctrine that the issuance of a writ of possession is a ministerial function whereby the issuing court exercises neither
discretion nor judgment bears reiterating. The writ issues as a matter of course upon the filing of the proper motion and, if filed before
the lapse of the redemption period, the approval of the corresponding bond.[44]
Petitioners, however, are not without remedy. As reflected in the challenged Court of Appeals decision, under Section 8 [45] of Act No.
3135, as amended, petitioners, as successors-in-interest of mortgagor MICC, have 30 days from the time Banco Filipino is given
possession of the subject properties to question the validity of the auction sale under any of the two grounds therein stated by filing a
petition to set aside the same and cancel the writ of possession.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
SO ORDERED.
THIRD DIVISION
TRADERS ROYAL BANK,
Petitioner,

G.R. No. 172020

Present:
CARPIO MORALES, J.,

- versus -

Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

NORBERTO CASTAARES andMILAGROS Promulgated:

CASTAARES,
Respondents.
December 6, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:

Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the Decision [1] dated January
11, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint Decision [2] dated August 26, 1998 of the
Regional Trial 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 petitioner Traders Royal Bank various loans and credit
accommodations. Respondents executed two real estate mortgages (REMs) dated April 18, 1977 and January 25, 1978 covering their
properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 and T-37191). As evidenced by Promissory Note No. BD-77-113
dated May 10, 1977, petitioner released only the amount of P35,000.00 although the mortgage deeds indicated the principal amounts
as P86,000.00 and P60,000.00.[3]
Respondents were further granted additional funds on various dates under promissory notes[4] they executed in favor of the petitioner:
Type of Loan

Date Granted

Packing Credit
Packing Credit
Packing Credit
Packing Credit
Packing Credit
Packing Credit

May 10, 1977

May 18, 1977
June 23, 1977
August 19, 1977
April 4, 1978
April 19, 1978

Amount
P19,000.00
P25,000.00
P12,500.00
P 2,900.00
P18,000.00
P23,000.00

On June 22, 1977, petitioner transferred the amount of P1,150.00 from respondents current account to their savings account, which was
erroneously posted as P1,500.00 but later corrected to reflect the figure P1,150.00 in the savings account passbook. By the second quarter
of 1978, the loans began to mature and the letters of credit against which the packing advances were granted started to expire. Meanwhile,
on December 7, 1979, petitioner, without notifying the respondents, applied to the payment of respondents outstanding obligations the
sum of $4,220.00 or P30,930.49 which was remitted to the respondents thru telegraphic transfer from AMROBANK, Amsterdam by one
Richard Wagner. The aforesaid entries in the passbook of respondents and the $4,220.00 telegraphic transfer were the subject of
respondents letter-complaint[5] dated September 20, 1982 addressed to the Manager of the Regional Office 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 of the real estate mortgages. [6]Thereafter, a Certificate of Sale [7] covering all the mortgaged properties was issued by

Deputy Sheriff Wilfredo P. Borces in favor of petitioner as the lone bidder for P117,000.00 during the auction sale conducted on
November 24, 1981. Said certificate of sale was registered with the Office of the Register of Deeds on February 4, 1982.
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency judgment, claiming that after applying
the proceeds of foreclosure sale to the total unpaid obligations of respondents (P200,397.78), respondents were still indebted to
petitioner for the sum of P83,397.68.[8] Respondents filed their Answer With Counterclaim on December 27, 1982.[9]
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of the sums of P2,584.27 debited from
their savings account passbook and the equivalent amount of $4,220.00 telegraphic 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 Decision[11] dated August 26, 1998, the RTC ruled in favor of 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 the defendants directing the defendants jointly and solidarily to pay plaintiff the sum
of P83,397.68 with legal rate of interest to be computed 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 in the 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 they
believed petitioner committed to lend them, the evidence clearly shows that said REM was constituted as security for all the promissory
notes. No separate demand was made for the amount of P86,000.00 stated in the REM, as the demand was limited to the amounts of the
promissory notes. The trial court further noted that respondents 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 no objection thereto was made by the respondents until five
years later when in a letter dated August 10, 1982, respondents counsel asked petitioner to be enlightened on the matter. Neither did
respondents protest the application of the balance (P1,150.00) in the passbook to his account with petitioner. More important,
respondent Norberto Castaares in his testimony admitted that the matter was already clarified to him by petitioner and that the latter
had the right to apply his deposit to his loan accounts. Admittedly, his complaint has to do more with the lack of consent on his part
and the non-issuance of official receipt. However, he did not follow up his request for official 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 Decision[15] dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered 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 Civil Case No. R-22608, the real estate mortgage dated April 18, 1977 is hereby DECLARED as valid in
part as to the amount of P35,000.00 actually released in favor of appellants, while the real estate mortgage
dated January 26, 1978 is hereby declared as null and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby
ordered to 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 no adequate evidence presented to prove that petitioner
released in full to the respondents the proceeds of the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate
Court[17] and Naguiat v. Court of Appeals,[18] the appellate court declared that where there was failure of the mortgagee bank to deliver
the consideration for which the mortgage was executed, the contract of loan was invalid and consequently the accessory contract of
mortgage is likewise null and void. In this case, only P35,000.00 out of the P86,000.00 stated in the REM dated April 18, 1977 was
released to respondents, and hence the REM was valid only to that extent. For the same reason, the second REM was null and void
since no actual loan proceeds were released to the respondents-mortgagors. The REMs are not connected to the subsequent promissory
notes because these were signed by respondents for the sole purpose of securing packing credits and export advances. Further
citingAcme Shoe, Rubber and Plastic Corp. v. Court of Appeals,[19] the CA stated that the rule is that a pledge, real estate mortgage or
antichresis may exceptionally secure after-incurred obligations only as long as these debts are accurately described therein. In this
case, neither of the two REMs accurately described or even mentioned the securing of future debts or 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 petitioner had 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 and
respondents. Petitioner had no authority to convert the said telegraphic transfer into cash since the participation of respondents was
necessary to sign and indorse the disbursement voucher and check. Moreover, petitioner was not transparent in its actions as it did not
inform the respondents of its intention to apply the proceeds of the telegraphic transfer to their loan account and worse, it did not even
present an official receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise known as the Foreign Currency Deposit
Act, provides that there shall be no restriction on the withdrawability by the depositor of his deposit or the transferability of the same
abroad except those arising from contract between the depositor and the bank. [21]

The Petition
Petitioner raised the following grounds in the review of the CA decision:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE MORTGAGE DATED
18 APRIL 1977 IS VALID ONLY IN PART TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE
AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TO RESPONDENTS 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 NO ACTUAL LOAN PROCEEDS WERE RELEASED IN
FAVOR OF THE RESPONDENTS.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD NO BASIS IN
WITHHOLDING AND SUBSEQUENTLY APPLYING IN PAYMENT 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 stipulation in the REMs that the mortgage extends not only to the amounts
specified therein but also to loans or credits subsequently granted, which include the packing credits and export advances obtained by
the respondents. Moreover, the amounts indicated on the REMs need not exactly be the same amounts that should be released and
covered by checks or credit memos, the same being only the maximum sum or ceiling which the REM secures, as explained by
petitioners witness, Ms. Blesy Nemeo. Her testimony does not prove that the proceeds of the loans were not released in full, as no
credit memos in the specific amounts received by the respondents can be presented.
Petitioner argues that the rulings cited by the CA do not at all support its conclusion that the promissory notes were totally unrelated to
the REMs. In the Acme case, the pronouncement was that the after-incurred obligations must, at the time they are contracted, only be
accurately described in a proper instrument as in the case of a promissory note. The confusion was brought by the use in 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 future loans can
be accurately described, as the CA opined, at the time that a deed of real estate mortgage is executed. The CAs reliance on the case
of Filipinas Marble Corporation, is likewise misplaced as it finds no application under the facts obtaining in the present case. The
misappropriation by some individuals of the loan proceeds secured by petitioner was the consideration which compelled this Court to
rule that there was failure on the part of DBP to deliver the consideration for which the mortgage was executed. Similarly, the case
of Naguiat is inapplicable in that there was evidence that an agent of the creditor withheld from the debtor the checks representing the
proceeds of the loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the 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 bound
principally as both creditors and debtors of each other, the debts consisting 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 ofP30,930.20
(peso equivalent of $4,220.00) to the loan account of the respondents.
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 the Mortgagor and/or SPS. NORBERTO V. CASTAARES & MILAGROS M.
CASTAARES and to secure the payment of the same, the principal of all of which is hereby fixed at EIGHTYSIX THOUSAND PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee
may hereafter extend to the Mortgagor x x x, 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 x x x.[24] (Emphasis supplied.)

The above stipulation is also known as dragnet clause or blanket mortgage clause in American jurisprudence that would subsume all
debts of past and future origins. It has been held as a valid and legal undertaking, the amounts specified as consideration in the
contracts do not limit the amount for which the pledge or mortgage stands as security, if from the four corners of the instrument, the
intent to secure future and other indebtedness can be gathered. A pledge or mortgage given to secure future advancements is a
continuing security and is not discharged by the repayment of the amount named in the mortgage until the full amount of all
advancements shall have been paid.[25]

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, et cetera.[26] While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be
sufficiently described in the mortgage contract. An obligation 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 the full amount of the principal loan stated in the deed should have
been released in full, sustaining the position of the respondents that the promissory notes were not secured by the mortgage and
unrelated to it. However, a reading of the afore-quoted provision of the REMs shows that its terms are broad enough to cover packing
credits and export advances granted by the petitioner to respondents. That the respondents subsequently availed of letters of credit and
export advances in various amounts as reflected in the promissory notes, buttressed the claim of petitioner that the amounts
of P86,000.00 and P60,000.00 stated in the REMs merely represent the maximum total loans which will be secured by the
mortgage. This must be so as respondents confirmed that the mortgage 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 andP60,000.00, in full, simultaneous or immediately following the execution of the REMs -- under a single promissory
note each equivalent to the said sums -- and no demand for the said specific amounts was ever made by the petitioner. Even the lettercomplaint sent by respondents to the Central Bank almost a year after the extrajudicial foreclosure sale mentioned only the questioned
entries in their passbook and the $4,220.00 telegraphic transfer. Considering that respondents deemed it a serious banking malpractice
for petitioner not to release in full the loan amount stated in the REMs, it can only be inferred that respondents themselves understood
that the P86,000.00 and P60,000.00 indicated in the REMs was intended merely to fix a ceiling for the loan accommodations which
will be secured thereby and not the actual principal loan to be released at one time. Thus, the RTC did not err in upholding the validity
of the REMs and ordering the respondents 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 present controversy. In Filipinas Marble Corporation, we held that pending
the outcome of litigation between DBP which together with Bancom officers were alleged by the petitioner-mortgagor to have
misspent and misappropriated the $5 million loan granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions against
foreclosures by government financial institutions, cannot be automatically applied. Foreclosure of the mortgaged properties for the
whole amount of the loan was deemed prejudicial to the petitioner, its employees and their families since the true amount of the loan
which was applied for the benefit of the petitioner can be determined only after a trial on the merits. [28] No such act of
misappropriation by corporate officers appointed by the mortgagee is involved in this case. Besides, the respondents never denied
receiving the amounts under the promissory notes which were all covered 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 and
the borrower did not receive the proceeds of the loan. Hence, we held the mortgage contract, being just an accessory contract, as null
and 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 in the execution of the REMs consist of those credit accommodations
to fund their export transactions. Respondents as an afterthought raised issue on the nature of the amounts of principal loan indicated
in the REMs long after these obligations have matured and the mortgage foreclosed due to their failure to fully settle their outstanding
accounts with petitioner. Having expressly agreed to the terms of the REMs which are phrased to secure all such loans and
advancements to be obtained from petitioner, although the principal amount stated therein were not released at one time and under
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 applied by the petitioner to the loan account of respondents, we hold that
the CA erred in holding that petitioner had no authority to do so by way of compensation or set off. In this case, the parties stipulated
on 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 at maturity, I/We jointly and severally, agree
to pay an additional amount equivalent to two per cent (2%) per annum of the amount due and demandable as
penalty and collection charges, in the form of liquidated damages, until fully paid; and the further sum of ten per
cent (10%) thereof in full, without any deduction, as and for attorneys fees whether actually incurred or not,
exclusive of costs and judicial/extrajudicial expenses; moreover, I/We, jointly and severally, further empower and
authorize the TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the
payment of this note any and all funds, which may be in its hands on deposit or otherwise belonging to anyone
or all of us, and to hold as security therefor any real or personal property, which may be in its possession or control
by virtue of any other contract.[30](Emphasis supplied.)

Agreements for compensation of debts or any obligations when the parties are mutually creditors and debtors are allowed
under Art. 1282 of the Civil Code even though not all the legal requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are not yet due. [31] The only requirements for conventional
compensation are (1) that each of the parties can fully dispose of the credit he seeks to compensate, and (2) that they agree to the
extinguishment of their mutual credits.[32] Consequently, no error was committed by the trial court in holding that petitioner validly
applied, by way of compensation, the $4,220.00 telegraphic transfer remitted by respondents foreign client through the petitioner.
WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of the Court of Appeals in CA-G.R. CV
No. 67257 is REVERSED 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.

[G.R. No. 130722. December 9, 1999]

SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO SUPPLY,
INC., petitioners, vs. L & R CORPORATION, VICENTE COLOYAN in his capacity as Acting Registrar of the
Register of Deeds of Quezon City thru Deputy Sheriff ROBERTO R. GARCIA, respondents.
DECISION
YNARES-SANTIAGO, J.:
May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the consent
of the mortgagee and that, otherwise, the sale made without the mortgagees consent shall be invalid; and (b) for a right of first refusal
in favor of the mortgagee?
The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of
P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The
loans were secured by a mortgage[1] constituted by the spouses upon their two parcels of land and the improvements thereon located in
Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters,
respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they had
previously mortgaged to L & R Corporation for the sum of P430,000.00. [2] The sale was annotated at the back of the respective
certificates of title of the properties.[3]
Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated extrajudicial
foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold at public

auction to L & R Corporation as the only bidder for the amount of P221,624.58. [4] When L & R Corporation presented its
corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on
August 15, 1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to PWHAS upon seeing
the inscription at the back of the certificates of title. Thus, on August 20, 1980, it wrote a letter [5] to the Register of Deeds of Quezon
City requesting for the cancellation of the annotation regarding the sale to PWHAS. L & R Corporation invoked a provision in its
mortgage contract with the spouses Litonjua stating that the mortgagees prior written consent was necessary in case of subsequent
encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was made without its prior written
consent, the same should not have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered
payment of the full redemption price to L & R Corporation in the form of China Bank Managers Check No. HOF-M O12623 in the
amount of P238,468.04.[6] See Exhibits G & 2, Letter of PWHAS to L & R Corporation, id.6 L & R Corporation, however, refused to
accept the payment, hence, PWHAS was compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of Quezon
City. On March 31, 1981, it tendered payment of the redemption price to the Deputy Sheriff through China Bank Managers Check No.
HOF-O14750 in the amount of P240,798.94.[7] The check was deposited with the Branch Clerk of Court who issued Receipt No.
7522484[8] for the full redemption price of the mortgaged properties. Accordingly, the Deputy Sheriff issued a Certificate of
Redemption in favor of the spouses Litonjua dated March 31, 1981.[9]
In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the full redemption
price and advised it that it can claim the payment upon surrender of its owners duplicate certificates of title. [10]
On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in their favor to the
Register of Deeds of Quezon City. The Certificate also informed L & R Corporation of the fact of redemption and directed the latter to
surrender the owners duplicate certificates of title within five days. [11]
On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds, stating: (1) that the
sale of the mortgaged properties to PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real
Estate Mortgage; and (2) that it was not the spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties,
when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity to redeem the same. [12]
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of
Redemption as an adverse claim on the titles of the subject properties on account of the refusal of L & R Corporation to surrender the
owners duplicate copies of the titles to the subject properties. With the refusal of the Register of Deeds to annotate their Certificate of
Redemption, the Litonjua spouses filed a Petition [13] on July 17, 1981 against L & R Corporation for the surrender of the owners
duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First Instance of Quezon City, Branch IV,
docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of Ownership.
Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu
thereof, issued Transfer Certificates of Title No. 280054[15] and 28055[16] in favor of L & R Corporation, free of any lien or
encumbrance.
[14]

With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of land that
being the new owner, the rental payments should be made to them, and that new lease contracts will be executed with interested
tenants before the end of August, 1981.[17] Upon learning of this incident from their tenants, the spouses Litonjua filed an adverse
claim[18] and a notice of lis pendens[19] with the Register of Deeds. In the process, they learned that the prior sale of the properties in
favor of PWHAS was not annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by the spouses
Litonjua and PWHAS against herein respondents before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil
Case No. Q-33362.[20] On February 10, 1987, the lower court rendered its Decision [21] dismissing the Complaint upon its finding that
the sale between the spouses Litonjua and PWHAS was null and void and unenforceable against L & R Corporation and that the
redemption made was also null and void.

On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June 22, 1994, [22] on the
ground that the sale made to PWHAS as well as the redemption effected by the spouses Litonjua were valid. However, the same was
subsequently reconsidered and set aside in an Amended Decision dated September 11, 1997.[23]
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the knowledge and
consent of L & R Corporation, is valid and enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the spouses Litonjua; and
(4) whether or not there was a valid redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the real property/properties
subject of this mortgage without the prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage, the MORTGAGEE shall be
duly notified thereof by the MORTGAGORS, and should the MORTGAGEE be interested to purchase the same, the latter shall be
given priority over all the other prospective buyers;[24]
There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to
PWHAS without the prior written consent of L & R Corporation and without giving the latter notice of such sale nor priority over
PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity of subsequent sale to PWHAS

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil
Code which provides that (A) stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo, [25] a stipulation prohibiting the mortgagor from entering
into second or subsequent mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed
of Real Estate Mortgage which also forbids any subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v.
Rehabilitation Finance Corporation,[26] the case of Philippine Industrial Co., supra, was erroneously cited to have held that the
prohibition in a mortgage contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the
mortgagee is valid. No similar prohibition forbidding the owner of mortgaged property from (subsequently) mortgaging the
immovable mortgaged is found in our laws, making the ruling in Philippine Industrial Co., supra, perfectly valid. On the other hand,
to extend such a ruling to include subsequent sales or alienation runs counter not only to Philippine Industrial Co., itself, but also
to Article 2130 of the New Civil Code.
Meanwhile in De la Paz v. Macondray & Co., Inc.,[27] it was held that while an agreement of such nature does not nullify the
subsequent sale made by the mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the
necessity of either notifying the purchaser or including him as a defendant. At the same time, the purchaser of the mortgaged property
was deemed not to have lost his equitable right of redemption.
In Bonnevie v. Court of Appeals,[28] where a similar provision appeared in the subject contract of mortgage, the petitioners
therein, to whom the mortgaged property were sold without the written consent of the mortgagee, were held as without the right to
redeem the said property. No consent having been secured from the mortgagee to the sale with assumption of mortgage by petitioners
therein, the latter were not validly substituted as debtors. It was further held that since their rights were never recorded, the mortgagee
was charged with the obligation to recognize the right of redemption only of the original mortgagors-vendors. Without discussing the
validity of the stipulation in question, the same was, in effect, upheld.

Again, in Cruz v. Court of Appeals,[29] while a similar provision was recognized and applied, no discussion as to its validity was
made since the same was not raised as an issue.
On the other hand, in Tambunting v. Rehabilitation Finance Corporation,[30] the validity of a similar provision was specifically
raised and discussed and found as invalid. It was there ratiocinated that -To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting,
does contain a provision that the property mortgaged shall not be x x x the subject of any new or subsequent contracts of agreements,
saving and excepting those having connection with the first mortgage with the RFC, without first securing the written permission and
consent of the MORTGAGEE. But the provision can only be construed as directed against subsequent mortgages or encumbrances,
not to an alienation of the immovable itself. For while covenants prohibiting the owner from constituting a later mortgage over
property registered under the Torrens Act have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45
Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations forbidding the owner from alienating the
immovable mortgaged are expressly declared void by law (Art. 2130, Civil Code). It is clear that the stipulation against subsequent
agreements above mentioned had not been breached by the assignment by the Escuetas (to the Hernandezes) of their right of
redemption in connection with the mortgage constituted in favor of the R.F.C. The assignment was not a subsequent mortgage or
encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the
encumbered real property in truth, an alienation of the immovable which could not lawfully be forbidden. Moreover, since the subject
of the assignment to the Hernandezes had connection with the first assignment with the R.F.C., it did not fall within, but was explicitly
excepted from, the prohibitory stipulation in question. Finally, it should not be forgotten that since the Tambuntings, in their own deed
of conditional sale with the R.F.C., had accepted without demur the provision that said contract could be revoked within one (1) year
from September 16, 1955 at the option of the RFC, as vendor, should the former owner (Escueta) exercise his right to redeem the
property; and that the redemption of the property within said period by the former owner or his successor-in-interest would render
their instrument of conditional sale automatically null and void and without effect, they cannot now assume a position inconsistent
with said provision. (underscoring, Ours)
Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of
the debtor, whose right to dispose a principal attribute of ownership is not thereby lost. Thus, a mortgagor had every right to sell his
mortgaged property, which right the mortgagee cannot oppose.
In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v. Court of Appeals,
supra, and Medida v. Court of Appeals. [32] According to the Court of Appeals, said cases, are not only more recent that that
of Tambunting, supra, but are also more applicable to the issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no
discussion as to its validity was made since the same was not raised as an issue.Thus, it cannot be said that the specific pronouncement
in the Tambunting case that such a stipulation can only be construed as against subsequent mortgages or encumbrances but not to an
alienation of the immovable itself, which is prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in the
case of Medida v. Court of Appeals, are different from those in the present case for what was in issue in the said case was a second
mortgage over a foreclosed property during the period of redemption. Thus, the ruling in Medida quoted in the Amended Decision that
what is delimited is not the mortgagors jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of
disposal which may correspondingly be restricted, actually refers to the fact that the only rights which a mortgagor can legally
transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the possession use and enjoyment
of the same during the period of redemption. It has no connection or reference to the right of a mortgagor to sell his mortgaged
property without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of
the stipulation in controversy.
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the
consent of the mortgagee is concerned, therefore, the ruling in theTambunting case is still the controlling law. Indeed, we are fully in
accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and
the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains
no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent
of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the
stipulation in question without taking into consideration the end result of requiring such prior written consent. True, the provision does
not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless

achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the
mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling
the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his
mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage
circumvent the law, specifically, Article 2130 of the New Civil Code.
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the
sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.
Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in
the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the
shoes of the spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem
the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it the assumption of the obligations
burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the
Tambuntings. The Hernandezes, by stepping into the Escuetas shoes as assignees, had the obligation to pay the mortgage debts,
otherwise, these debts would and could be enforced against the property subject of the assignment. Stated otherwise, the Hernandezes,
by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured;
that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner
prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed,
they had the so-called equity of redemption.
The redemption of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only
the mortgagor-debtor the right to redeem, but also his successors-in-interest.As vendee of the subject properties, PWHAS qualifies as
such a successor-in-interest of the spouses Litonjua.
Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of
the foreclosure sale, well within the one year period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9
thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the
event the mortgagor decides to sell the same. We see nothing wrong in this provision. The right of first refusal has long been
recognized as valid in our jurisdiction. The consideration for the loan-mortgage includes the consideration for the right of first
refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua provided that in case they
decide to sell the property mortgaged to it, then L & R Corporation shall be given the right to match the offered purchase price and to
buy the property at that price. Thus, while the spouses Litonjua had every right to sell their mortgaged property to PWHAS without
securing the prior written consent of L & R Corporation, it had the obligation under paragraph 9, which is a perfectly valid provision,
to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of L & R
Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same
terms and conditions offered to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporations contractual right of first refusal? On this
score, we agree with the Amended Decision of the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman,
Bocaling & Co v. Bonnevie[33] is instructive on this point
The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the
Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the
sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation
for damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the
moment prior to the celebration of said contract. It is a relief allowed for one of the contracting parties and even third persons from all
injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract. Rescission
implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for
reasons of equity. (underscoring, Ours)
It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject
properties since the Deed of Real Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As
such, PWHAS is presumed to have been notified thereof by registration, which equates to notice to the whole world.
We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as
PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the
subject properties at the same purchase price of P430,000.00, and was agreeable to pay the difference between such purchase price
and the redemption price of P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did
not duly exercised its right of first refusal at the opportune time cannot be taken against it, precisely because it was not notified by the
spouses Litonjua of their intention to sell the subject property and thereby, to give it priority over other buyers.
All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the
spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporations prior written consent thereto. Inasmuch as
the sale to PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-in-interest of the spouses
Litonjua, within the one-year period should have been accepted as valid by L & R Corporation. However, while the sale is, indeed,
valid, the same is rescissible because it ignored L & R Corporations right of first refusal.
Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original status quo, with
no sale having been made, they should now be allowed to redeem the subject properties, the period of redemption having been
suspended during the period of litigation. In effect, the spouses Litonjua want to retain ownership of the same. We cannot, however,
sanction this belated reversal of the spouses Litonjuas decision to sell. To do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the intervening years when they precisely were the ones who violated and ignored
the right of first refusal of L & R Corporation over the same. Moreover, it must be stressed that in rescinding the sale made to
PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R Corporation.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo and Erlinda
Litonjua and Philippine White House Auto Supply, Inc. and ordering said spouses to return to Philippine White House
Auto Supply, Inc. the purchase price of P430,000.00;
(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine White House Auto
Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia to return to it the redemption check of P240,798.94;
(d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but ordering it to
pay to the Litonjua spouses the additional sum of P189,201.96 representing the difference from the purchase price of
P430,000.00 in the rescinded sale;
(e) Deleting the awards for moral and exemplary damages and attorneys fees to the respondents.
No pronouncement as to costs.
SO ORDERED.
Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing, Purisima, Pardo, Buena, Gonzaga-Reyes, and De Leon, Jr.,
JJ., concur.

Vitug, J., see concurring and dissenting.

Davide, Jr., C.J., and Mendoza, J., joins J. Vitug in his concurring and dissenting opinion.