2digest Civil

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CASE DIGESTS
PERSONS AND FAMILY RELATIONS
Conjugal Partnerships; Effect of the spouses signing as surety
ALFREDO CHING and ENCARNACION CHING vs. COURT OF APPEALS

[G.R. No. 124642. February 23, 2004.]
CALLEJO, SR.
FACTS: The Philippine Blooming Mills Company, Inc. (PBMCI) obtained a loan of P9,000,000 from
the Allied Banking Corporation (ABC). By virtue of this loan, the PBMCI, through its Executive Vice-
President Alfredo Ching, executed a promissory note for the said amount promising to pay on
December 22, 1978 at an interest rate of 14% per annum. As an added security for the said loan,
Alfredo Ching, together with Emilio Tañedo and Chung Kiat Hua, executed a continuing guaranty
with the ABC binding themselves to jointly and severally guarantee the payment of all the PBMCI
obligations owing to the ABC. The PBMCI defaulted in the payment of all its loans. Hence, on August
21, 1981, the ABC filed a complaint for sum of money with prayer for a writ of preliminary
attachment against the PBMCI to collect the P12,612,972.88 exclusive of interests, penalties and
other bank charges. Impleaded as co-defendants in the complaint were Alfredo Ching, Emilio
Tañedo and Chung Kiat Hua in their capacity as sureties of the PBMCI. Citing as one of the grounds
for the writ was the fraud defendants employed in incurring the obligations by representing
themselves as having the financial capacity to pay the loan when in fact they did not have such
capacity.
In the meantime, on July 26, 1983, the deputy sheriff of the trial court levied on
attachment the 100,000 common shares of Citycorp stocks in the name of Alfredo Ching. On
November 16, 1993, Encarnacion T. Ching, assisted by her husband Alfredo Ching, filed a Motion to
Set Aside the levy on attachment. She alleged inter alia that the 100,000 shares of stocks levied on
by the sheriff were acquired by her and her husband during their marriage out of conjugal funds
after the Citycorp Investment Philippines was established in 1974. Furthermore, the indebtedness
covered by the continuing guaranty/comprehensive suretyship contract executed by petitioner
Alfredo Ching for the account of PBMCI did not redound to the benefit of the conjugal partnership.
She, likewise, alleged that being the wife of Alfredo Ching, she was a third-party claimant entitled
to file a motion for the release of the properties. She attached therewith a copy of her marriage
contract with Alfredo Ching.
The petitioner-spouses aver that the source of funds in the acquisition of the levied shares
of stocks is not the controlling factor when invoking the presumption of the conjugal nature of
stocks under Art. 160 and that such presumption subsists even if the property is registered only in
the name of one of the spouses, in this case, petitioner Alfredo Ching. According to the petitioners,
the suretyship obligation was not contracted in the pursuit of the petitioner-husband's profession or
business. And where conjugal assets are attached in a collection suit on an obligation contracted by
the husband, the wife should exhaust her motion to quash in the main case and not file a separate
suit. Furthermore, the petitioners contend that under Art. 125 of the Family Code, the petitioner-
husband's gratuitous suretyship is null and void ab initio, and that the share of one of the spouses in
the conjugal partnership remains inchoate until the dissolution and liquidation of the partnership.
The trial court initially granted the lifting of the preliminary attachment but on appeal, the
decision was reversed, the appellate court holding that petitioner Encarnacion Ching was not a
proper party to the action and that even if she possessed such right, her action was already barred
by laches. The appellate court also ruled that the presumption under Art. 160 was inapplicable in
the present case, when petitioner-spouses failed to prove the source of the money used to acquire
the shares of stock. Hence this present petition.
ISSUES:
CIVIL LAW COMMITTEE AND DIGEST POOL

 CHAIRPERSON: Romuald Padilla  ASST. CHAIRPERSON: Vida Bocar, Joyce Vidad  EDP’S: Alnaiza Hassiman, Dots Gayon  SUBJECT HEADS: Butch Marasigan
(Persons and Family Relations), Donnie Casabar (Property), Aira Ferrer (Wills and Succession), Ian Pua (Obligations and Contracts), Lai Dumama
(Sales and Lease),
Stephen Quiambao (PAT), Chris Cabigao (Credit Transactions), Ligaya Alipao (Torts and Damages), Anthony Purganan (LTD), Rica Tugadi (Conflicts of
Law)
 DIGEST POOL: Michael Acejo, Johnsen Alejandro, Madelyn Almazora, Rowena Antonio, nissa Apolinario, Katrina Atienza, , Jen Balboa, Ishmalyn
Balbontin, Ian Bartolome, Regina Batac, Janet Calderon, Hashreen Caudang, Bambi Delos Reyes, Jeenice de Sagun, Wren Dones, Edsel Duque,
Rojane Elopre, Ulysses Gonzales, Randy Guina, Mae Ann Gutierrez, Ghia Hurtado, Anelyn Javillonar, Louell Pamela Neriessette Labriaga, Maureen
Lontoc, Diana Marie Miano, Sophie Nepomuceno, Genevieve Nueve, Iggy Sapalo, Ayn Sarsaba, Rachelle Saya, Pam Solis, Tom Timbol, Paulette
Tongcua, Jocelyn Tsang, Joanne Villareal, Rhyne Ypulong.Rhyne Ypulong.y
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1. Do the 100,000 shares of stock in the name of Alfredo Ching belong to the conjugal
partnership?
2. Is the conjugal partnership liable for the payment of the liability?
HELD: 1. YES. Article 160 of the New Civil Code provides that all the properties acquired during
the marriage are presumed to belong to the conjugal partnership; unless it be proved that it
pertains exclusively to the husband, or to the wife. In Tan v. Court of Appeals, we held that it is
not even necessary to prove that the properties were acquired with funds of the partnership. As
long as the properties were acquired by the parties during the marriage, they are presumed to be
conjugal in nature. In fact, even when the manner in which the properties were acquired does not
appear, the presumption will still apply, and the properties will still be considered conjugal. The
presumption of the conjugal nature of the properties acquired during the marriage subsists in the
absence of clear, satisfactory and convincing evidence to overcome the same.
In this case, the evidence adduced by the petitioners in the RTC is that the 100,000 shares
of stocks in the Citycorp Investment Philippines were issued to and registered in its corporate books
in the name of the petitioner-husband when the said corporation was incorporated on May 14,
1979. This was done during the subsistence of the marriage of the petitioner-spouses. The shares of
stocks are, thus, presumed to be the conjugal partnership property of the petitioners. The private
respondent failed to adduce evidence that the petitioner-husband acquired the stocks with his
exclusive money. The barefaced fact that the shares of stocks were registered in the corporate
books of Citycorp Investment Philippines solely in the name of the petitioner-husband does not
constitute proof that the petitioner-husband, not the conjugal partnership, owned the same.
2. NO. For the conjugal partnership to be liable for a liability that should appertain to the
husband alone, there must be a showing that some advantages accrued to the spouses. Certainly,
to make a conjugal partnership responsible for a liability that should appertain alone to one of the
spouses is to frustrate the objective of the New Civil Code to show the utmost concern for the
solidarity and well being of the family as a unit. The husband, therefore, is denied the power to
assume unnecessary and unwarranted risks to the financial stability of the conjugal partnership.
In this case, the private respondent failed to prove that the conjugal partnership of the petitioners
was benefited by the petitioner-husband's act of executing a continuing guaranty and suretyship
agreement with the private respondent for and in behalf of PBMCI. The contract of loan was
between the private respondent and the PBMCI, solely for the benefit of the latter. No presumption
can be inferred from the fact that when the petitioner-husband entered into an accommodation
agreement or a contract of surety, the conjugal partnership would thereby be benefited. The
private respondent was burdened to establish that such benefit redounded to the conjugal
partnership.
PERSONS: Property Relations Between Husband And Wife

WILLS: Intestate Succession
CONTRACTS: Sale Or Mortgage
FLORDELIZA CALPATURA FLORA vs. ROBERTO PRADO, ET. AL.

[G.R. No. 156879. January 20, 2004.]
YNARES-SANTIAGO
FACTS: The property under litigation is the northern half portion of a residential Quezon City and
covered by TCT No. 71344 issued in the name of Narcisa Prado and her children by her first
husband, Patricio Prado, Sr., namely, Roberto, Erlinda, Daniel, Gloria, Patricio, Jr. and Edna,
respondents herein. After the death of Patricio Prado, Sr., Narcisa married Bonifacio Calpatura. In
order to support her minor children with her first husband, Narcisa and her brother-in-law, Tomas
Calpatura, Sr., executed an Agreement of Purchase and Sale whereby the former agreed to sell to
the latter the northern half portion of the property for the sum of P10,500. A Deed of Absolute Sale
was subsequently executed by the parties.
In 1976, Tomas' daughter, Flordeliza Calpatura Flora, built a two-storey duplex with
firewall on the northern half portion of the property. Respondents, who occupied the southern half
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda Tolentino (VC-Acads), Jennifer Ang (VC-
Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-EDP), Anna Margarita Eres (VC-Logistics) Jonathan Mangundayao
(Political Law), Francis Benedict Reotutar (Labor Law),
Romuald Padilla (Civil Law), Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial Law),
Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
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portion of the land, did not object to the construction. Flordeliza Flora paid the corresponding
taxes on the property. Likewise, Maximo Calpatura, the son of Tomas' cousin, built a small house on
the northern portion of the property.
On April 8, 1991, respondents filed a complaint for declaration of nullity of sale and
delivery of possession of the northern half portion of the subject property against petitioners
Flordeliza Calpatura Flora, Dominador Calpatura and Tomas Calpatura, Jr. before the RTC.
Respondents alleged that the transaction embodied in the Agreement to Purchase and Sale
between Narcisa and Tomas was one of mortgage and not of sale; that Narcisa's children tried to
redeem the mortgaged property but they learned that the blank document which their mother had
signed was transformed into a Deed of Absolute Sale; that Narcisa could not have sold the northern
half portion of the property considering that she was prohibited from selling the same within a
period of 25 years from its acquisition, pursuant to the condition annotated at the back of the title;
that Narcisa, as natural guardian of her children, had no authority to sell the northern half portion
of the property which she and her children co-owned; and that only P5,000.00 out of the
consideration of P10,500.00 was paid by Tomas.
In their answer, petitioners countered among others, that Narcisa owned 9/14 of the
property, consisting of ½ as her share in the conjugal partnership with her first husband and 1/7 as
her share in the estate of her deceased husband; and that the consideration of the sale in the
amount of P10,500 had been fully paid as of April 1, 1968.
On April 2, 1997, the RTC dismissed the complaint. It found that the sale was valid; that
the Agreement to Purchase and Sale and the Deed of Absolute Sale were duly executed; and that
the sum of P10,500.00 as selling price for the subject property was fully paid there being no
demand for the payment of the remaining balance. The CA affirmed the RTC’s decision with the
modification the sale in dispute is declared valid only with respect to the one-seventh (1/7) share
of plaintiff-Narcisa Prado in the subject property. Hence, this petition.
ISSUES:
1. Is the subject property conjugal or paraphernal?
2. Was the transaction a sale or a mortgage?
3. How should the property be divided among the heirs of Patricio Prado, Sr.?
HELD: 1. CONJUGAL. Article 160 of the Civil Code, which was in effect at the time the sale was
entered into, provides that all property of the marriage is presumed to belong to the conjugal
partnership unless it is proved that it pertains exclusively to the husband or to the wife. Proof of
acquisition during the marriage is a condition sine qua non in order for the presumption in favor of
conjugal ownership to operate.
In the instant case, while Narcisa testified during cross-examination that she bought the
subject property from People's Homesite Housing Corporation with her own funds, she, however
admitted in the Agreement of Purchase and Sale and the Deed of Absolute Sale that the property
was her conjugal share with her first husband, Patricio, Sr.
2. SALE. Public or notarial documents may be presented in evidence without further

proof, the certificate of acknowledgment being prima facie evidence of the execution of the
instrument or document involved. In order to contradict the presumption of regularity of a public
document, evidence must be clear, convincing, and more than merely preponderant.
It is well-settled that in civil cases, the party that alleges a fact has the burden of proving
it. Except for the bare allegation that the transaction was one of mortgage and not of sale,
respondents failed to adduce evidence in support thereof. Respondents also failed to controvert
the presumption that private transactions have been fair and regular.
Furthermore, Narcisa, in fact did not deny that she executed an Affidavit allowing spouses
Wilfredo and Flordeliza Flora to construct a firewall between the two-storey duplex and her house
sometime in 1976. While the deed of sale between Tomas and Narcisa was never registered nor
annotated on the title, respondents had knowledge of the possession of petitioners of the northern
half portion of the property.

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3. The property being conjugal, upon the death of Patricio Prado, Sr., one-half of the
subject property was automatically reserved to the surviving spouse, Narcisa, as her share in the
conjugal partnership. Patricio's rights to the other half, in turn, were transmitted upon his death to
his heirs, which includes his widow Narcisa, who is entitled to the same share as that of each of the
legitimate children. Thus, as a result of the death of Patricio, a regime of co-ownership arose
between Narcisa and the other heir in relation to the property. The remaining one-half was
transmitted to his heirs by intestate succession. By the law on intestate succession, his six children
and Narcisa Prado inherited the same at one-seventh (1/7) each pro indiviso. Inasmuch as Narcisa
inherited one-seventh (1/7) of her husband's conjugal share in the said property and is the owner of
one-half (½) thereof as her conjugal share, she owns a total of 9/14 of the subject property.
Hence, Narcisa could validly convey her total undivided share in the entire property to Tomas.
Narcisa and her children are deemed co-owners of the subject property.
Conjugal property; Alienation or encumbrance must be annulled in its entirety and not only
insofar as the share of the wife in the conjugal property is concerned if the latter’s consent
was not secured
HEIRS OF IGNACIA AGUILAR-REYES vs. SPOUSES CIPRIANO MIJARES and FLORENTINA MIJARES
[G.R. No. 143826. August 28, 2003.]
YNARES-SANTIAGO
FACTS: In 1960, Vicente Reyes married Ignacia Aguilar but they had been separated de facto in
1974. One of their conjugal properties is Lot No. 4349 B-2 and the apartment built thereon. The
said lot was registered in the name of Spouses Vicente Reyes and Ignacia Aguilar-Reyes.
Vicente Reyes filed a petition for administration and appointment of guardian with the
MTC. In the said petition, he misrepresented that his wife, Ignacia, died on March 12, 1982 and
that he and their minor children were her only heirs. The court appointed Vicente as guardian of
their minor children and subsequently authorized Vicente to sell the estate of Ignacia. On March 1,
1983, respondent Spouses Cipriano and Florentina Mijares bought Lot No. 4349-B-2 for P110,000. As
a consequence of which, the certificate of title in the name of Vicente and Ignacia Agilar-Reyes was
cancelled and a new title was issued in the name of respondent-spoues. These circumstances were
discovered by Ignacia sometime in 1984.
Ignacia then sent a letter to respondent-spouses demanding the return of her ½ share in
the lot. Failing to settle the matter amicably, Ignacia instituted a complaint for annulment of sale
against respondent-spouses and Vicente was included as one of the defendants. In their answer,
respondents claimed that they are purchasers in good faith and that the sale was valid because the
same was duly approved by the court.
After trial on the merits, the court a quo rendered a decision declaring the sale of Lot No.
4349-B-2 void with respect to the share of Ignacia. A motion for modification of the decision was
filed by Ignacia praying that the sale be declared void in its entirety and that the respondents be
ordered to reimburse the rentals collected on the apartments. The trial court granted the motion
for modification.
Both Ignacia and respondent-spouses appealed to the Court of Appeals. Pending the
appeal, Ignacia died and was substituted by her compulsory heirs. The appellate court reversed
the decision of the ocurt a quo, ruling that, notwithstanding the absence of Iganacia’s consent to
the sale, the same must be held valid in favor of respondent-spouses because they were innocent
purchasers for value.
ISSUES:
1. What is the status of the sale of Lot No. 4349-B-2 to respondent-spouses?
2. Would the sale, if voidable, be annulled in its entirety?
3. Were respondent-spouses purchasers in good faith?
HELD: 1. VOIDABLE. Pursuant to the foregoing provisions (Articles 166 and 173 of the Civil Code),
the husband could not alienate or encumber any conjugal real property without the consent,
express or implied, of the wife otherwise, the contract is voidable. Indeed, in several cases the
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Court had ruled that such alienation or encumbrance by the husband is void. The better view,
however, is to consider the transaction as merely voidable and not void. This is consistent with
Article 173 of the Civil Code pursuant to which the wife could, during the marriage and within 10
years from the questioned transaction, seek its annulment.
In Spouses Guiang v. Court of Appeals, the Court quoted with approval the ruling of the
trial court that under the Civil Code, the encumbrance or alienation of a conjugal real property by
the husband absent the wife's consent, is voidable and not void. Thus —
. . . Under Article 166 of the Civil Code, the husband cannot generally alienate or
encumber any real property of the conjugal partnership without the wife's consent. The alienation
or encumbrance if so made however is not null and void. It is merely voidable. The offended wife
may bring an action to annul the said alienation or encumbrance.
In the case at bar, there is no dispute that Lot No. 4349-B-2, is a conjugal property having
been purchased using the conjugal funds of the spouses during the subsistence of their marriage. It
is beyond cavil therefore that the sale of said lot to respondent spouses without the knowledge and
consent of Ignacia is voidable. Her action to annul the March 1, 1983 sale which was filed on June
4, 1986, before her demise is perfectly within the 10 year prescriptive period under Article 173 of
the Civil Code. Even if we reckon the period from November 25, 1978 which was the date when
Vicente and the respondent spouses entered into a contract concerning Lot No. 4349-B-2, Ignacia's
action would still be within the prescribed period.
2. YES. The trial court correctly annulled the voidable sale of Lot No. 4349-B-2 in its
entirety. In Bucoy v. Paulino, a case involving the annulment of sale with assumption of mortgages
executed by the husband without the consent of the wife, it was held that the alienation or
encumbrance must be annulled in its entirety and not only insofar as the share of the wife in the
conjugal property is concerned. Although the transaction in the said case was declared void and not
merely voidable, the rationale for the annulment of the whole transaction is the same thus —
The plain meaning attached to the plain language of the law is that the contract, in its
entirety, executed by the husband without the wife's consent, may be annulled by the wife. Had
Congress intended to limit such annulment in so far as the contract shall "prejudice" the wife, such
limitation should have been spelled out in the statute. It is not the legitimate concern of this Court
to recast the law. As Mr. Justice Jose B.L. Reyes of this Court and Judge Ricardo C. Puno of the
Court of First Instance correctly stated, "the rule in the first sentence of Article 173 revokes Baello
vs. Villanueva, 54 Phil. 213 and Coque vs. Navas Sioca, 45 Phil. 430," in which cases annulment was
held to refer only to the extent of the one-half interest of the wife.
The necessity to strike down the contract of July 5, 1963 as a whole, not merely as to the
share of the wife, is not without its basis in the common-sense rule. To be underscored here is that
upon the provisions of Articles 161, 162 and 163 of the Civil Code, the conjugal partnership is liable
for many obligations while the conjugal partnership exists. Not only that. The conjugal property is
even subject to the payment of debts contracted by either spouse before the marriage, as those for
the payment of fines and indemnities imposed upon them after the responsibilities in Article 161
have been covered (Article 163, par. 3), if it turns out that the spouse who is bound thereby,
"should have no exclusive property or if it should be insufficient." These are considerations that go
beyond the mere equitable share of the wife in the property. These are reasons enough for the
husband to be stopped from disposing of the conjugal property without the consent of the wife.
Even more fundamental is the fact that the nullity is decreed by the Code not on the basis of
prejudice but lack of consent of an indispensable party to the contract under Article 166.
3. NO. The Court finds that respondent spouses are not purchasers in good faith. A
purchaser in good faith is one who buys property of another, without notice that some other person
has a right to, or interest in, such property and pays full and fair price for the same, at the time of
such purchase, or before he has notice of the claim or interest of some other persons in the
property. He buys the property with the belief that the person from whom he receives the thing
was the owner and could convey title to the property. A purchaser cannot close his eyes to facts
which should put a reasonable man on his guard and still claim he acted in good faith.

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In the instant case, there existed circumstances that should have placed respondent
spouses on guard. The death certificate of Ignacia, shows that she died on March 22, 1982. The
same death certificate, however, reveals that — (1) it was issued by the Office of the Civil Registrar
of Lubao Pampanga on March 10, 1982; (2) the alleged death of Ignacia was reported to the Office
of the Civil Registrar on March 4, 1982; and (3) her burial or cremation would be on March 8, 1982.
These obvious flaws in the death certificate should have prompted respondents to investigate
further, especially so that respondent Florentina Mijares admitted on cross-examination that she
asked for the death certificate of Ignacia because she was suspicious that Ignacia was still alive.
Moreover, respondent spouses had all the opportunity to verify the claim of Vicente that he is a
widower because it was their lawyer, Atty. Rodriguito S. Saet, who represented Vicente in the
special proceedings before the Metropolitan Trial Court.
Psychological Incapacity; Sexual Infidelity
DAVID B. DEDEL vs. COURT OF APPEALS

[G.R. No. 151867. January 29, 2004.]
YNARES-SANTIAGO
FACTS: Petitioner David B. Dedel met respondent Sharon L. Corpuz while he was working in the
advertising business of his father. The acquaintance led to romantic relations and culminated in the
exchange of marital vows in a civil wedding on September 28, 1966 and a church wedding on May
20, 1967. The union produced four children.
Petitioner avers that during the marriage, Sharon turned out to be an irresponsible and
immature wife and mother. She had extra-marital affairs with several men among whom is a
Jordanian national. Sharon was once confined in the hospital for treatment by Dr. Lourdes Lapuz, a
clinical psychiatrist. Petitioner alleged that despite the treatment, Sharon did not stop her illicit
relationship with the Jordanian national named Mustafa Ibrahim, whom she married and with whom
she had two children. However, when Ibrahim left the country, Sharon returned to petitioner
bringing along her two children by Ibrahim. Petitioner accepted her back and even considered the
two illegitimate children as his own. Thereafter, on December 9, 1995, Sharon abandoned
petitioner to join Ibrahim in Jordan with their two children. Since then, Sharon would only return
to the country on special occasions.
Petitioner filed on April 1, 1997 a petition seeking the declaration of nullity of his marriage
on the ground of psychological incapacity, as defined in Article 36 of the Family Code, before the
RTC. Petitioner presented Dr. Natividad A. Dayan, who testified that she conducted a psychological
evaluation of petitioner and found him to be conscientious, hardworking, diligent, a perfectionist
who wants all tasks and projects completed up to the final detail and who exerts his best in
whatever he does.
On the other hand, Dr. Dayan declared that Sharon was suffering from Anti-Social
Personality Disorder exhibited by her blatant display of infidelity; that she committed several
indiscretions and had no capacity for remorse, even bringing with her the two children of Ibrahim
to live with petitioner. Such immaturity and irresponsibility are indications of Anti-Social
Personality Disorder amounting to psychological incapacity to perform the essential obligations of
marriage.
The RTC rendered a decision declaring the civil and church marriages of petitioner and
respondent null and void on the ground of psychological incapacity on the part of the respondent.
The CA set aside the judgment of the RTC. Hence, this petition.
ISSUE: Is the aberrant sexual behavior of respondent adverted to by petitioner fall within the term
"psychological incapacity"?
HELD: NO. Respondent's sexual infidelity can hardly qualify as being mentally or psychically ill to
such an extent that she could not have known the obligations she was assuming, or knowing them,
could not have given a valid assumption thereof. It appears that respondent's promiscuity did not
exist prior to or at the inception of the marriage. What is, in fact, disclosed by the records is a

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blissful marital union at its celebration, later affirmed in church rites, and which produced four
children.
Respondent's sexual infidelity or perversion and abandonment do not by themselves
constitute psychological incapacity within the contemplation of the Family Code. Neither could her
emotional immaturity and irresponsibility be equated with psychological incapacity. It must be
shown that these acts are manifestations of a disordered personality which make respondent
completely unable to discharge the essential obligations of the marital state, not merely due to her
youth, immaturity or sexual promiscuity.
At best, the circumstances relied upon by petitioner are grounds for legal separation under
Article 55 of the Family Code. However, Article 36 is not to be equated with legal separation in
which the grounds need not be rooted in psychological incapacity but on physical violence, moral
pressure, civil interdiction, drug addiction, habitual alcoholism, sexual infidelity, abandonment and
the like. In short, the evidence presented by petitioner refers only to grounds for legal separation,
not for declaring a marriage void.
Finally, the trial court has no jurisdiction to dissolve the church marriage of petitioner and
respondent. The authority to do so is exclusively lodged with the Ecclesiastical Court of the Roman
Catholic Church.
Legal Effects of Judicial Declaration of the Nullity of a subsequent marriage on the ground of
Psychological Incapacity
VERONICO TENEBRO vs COURT OF APPEALS

[GR No. 150758. FEBRUARY 18, 2004.]
YNARES-SANTIAGO
FACTS: Petitioner Veronico Tenebro contracted marriage with Hilda Villareyes on November 10,
1986. On April 10, 1990, petitioner contracted a subsequent marriage with Leticia Ancajas and the
two lived together until the latter part of 1991 when petitioner informed Ancajas about his
previous marriage with Villareyes and his plan of going back to his former wife. The second
marriage of petitioner with Ancajas was thereafter declared null and void on the ground of
psychological incapacity.
On January 25, 1993, petitioner contracted another marriage with Nilda Villegas. When
Ancajas came to know about this, she went to Villareyes and asked if the latter was really married
to petitioner. When Villareyes admitted that she and petitioner were legally married, Ancajas filed
before the RTC of Cebu a complaint for bigamy against petitioner.
In his answer, petitioner maintains that the declaration of the nullity of the second
marriage on the ground of psychological incapacity retroacted to the date on which the said
marriage was celebrated. As a consequence of which, petitioner asserts that he is not guilty of the
crime of bigamy as not all of its elements are present. After trial on the merits, the court a quo
rendered a decision finding petitioner guilty as charged. The Court of Appeals affirmed the
decision of the lower court.
ISSUE: Did the declaration of the nullity of petitioners’ second marriage retroact to the date of its
celebration?
HELD: NO. As a second or subsequent marriage contracted during the subsistence of petitioner's
valid marriage to Villareyes, petitioner's marriage to Ancajas would be null and void ab initio
completely regardless of petitioner's psychological capacity or incapacity. Since a marriage
contracted during the subsistence of a valid marriage is automatically void, the nullity of this
second marriage is not per se an argument for the avoidance of criminal liability for bigamy.
Pertinently, Article 349 of the Revised Penal Code criminalizes "any person who shall contract a
second or subsequent marriage before the former marriage has been legally dissolved, or before
the absent spouse has been declared presumptively dead by means of a judgment rendered in the
proper proceedings". A plain reading of the law, therefore, would indicate that the provision
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penalizes the mere act of contracting a second or a subsequent marriage during the subsistence of
a valid marriage.
Thus, as soon as the second marriage to Ancajas was celebrated on April 10, 1990, during
the subsistence of the valid first marriage, the crime of bigamy had already been consummated. To
our mind, there is no cogent reason for distinguishing between a subsequent marriage that is null
and void purely because it is a second or subsequent marriage, and a subsequent marriage that is
null and void on the ground of psychological incapacity, at least insofar as criminal liability for
bigamy is concerned.
Moreover, the declaration of the nullity of the second marriage on the ground of
psychological incapacity is not an indicator that petitioner's marriage to Ancajas lacks the essential
requisites for validity. The requisites for the validity of a marriage are classified by the Family Code
into essential (legal capacity of the contracting parties and their consent freely given in the
presence of the solemnizing officer) and formal (authority of the solemnizing officer, marriage
license, and marriage ceremony wherein the parties personally declare their agreement to marry
before the solemnizing officer in the presence of at least two witnesses). Under Article 5 of the
Family Code, any male or female of the age of eighteen years or upwards not under any of the
impediments mentioned in Articles 37 and 38 may contract marriage.
Although the judicial declaration of the nullity of a marriage on the ground of psychological
incapacity retroacts to the date of the celebration of the marriage insofar as the vinculum between
the spouses is concerned, it is significant to note that said marriage is not without legal effects.
Among these effects is that children conceived or born before the judgment of absolute nullity of
the marriage shall be considered legitimate. There is therefore a recognition written into the law
itself that such a marriage, although void ab initio, may still produce legal consequences. Among
these legal consequences is incurring criminal liability for bigamy. To hold otherwise would render
the State's penal laws on bigamy completely nugatory, and allow individuals to deliberately ensure
that each marital contract be flawed in some manner, and to thus escape the consequences of
contracting multiple marriages, while beguiling throngs of hapless women with the promise of
futurity and commitment.
As such, we rule that the third and fourth requisites for the crime of bigamy are present in
this case, and affirm the judgment of the Court of Appeals.
Psychological Incapacity; Requirements in Molina and Santos Applies Even To Mixed Marriages
REPUBLIC OF THE PHILIPPINES vs LOLITA QUINTERO-HAMANO

[GR No. 149498. MAY 20, 2004]
FACTS: Sometime in October 1986, private respondent Lolita Hamano and Toshio Hamano, a
Japanese national started a common-law relationship in Japan. The two thereafter lived in the
Philippines. On November 16, 1987, respondent gave birth to their child.
On January 14, 1988, Lolita and Toshio Hamano were married by Judge Isauro Balderia of
the MTC of Bacoor, Cavite. One month after their marriage, Toshio returned to Japan and
promised to return by Christmas to celebrate the holidays with his family. That promise was not
fulfilled as Toshio never came back to them. It is also alleged by respondent that Toshio has
stopped giving financial support to her and their child.
In the light of the foregoing, Lolita filed a complaint for declaration of nullity of her
marriage to her husband Tishio Hamano. As summons issued to Toshio remained unserved because
he was no longer residing at his given address, the court granted Lolita’s motion to effect service of
summons by publication. Respondent was thereafter allowed to present her evidence ex parte
after the prosecutor filed a report that no collusion existed between the parties.
On August 28, 1997, the court a quo rendered a decision declaring null and void, on the
ground of psychological incapacity, the marriage between Lolita and Toshio Hamano. Herein
petitioner, represented by the OSG appealed the above decision to the Court of Appeals, stressing
that the court a quo committed error in not applying the requirements laid down in Molina and
Santos cases. The Court of Appeals affirmed the decision of the lower court.

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ISSUE: Were the alleged acts of abandonment and irresponsibility of Toshio acts amounting to
psychological incapacity thus warranting the nullification of the marriage?
HELD: NO. Respondent seeks to annul her marriage with Toshio on the ground of psychological
incapacity. Article 36 of the Family Code of the Philippines provides that:
Art. 36. A marriage contracted by any party who, at the time of the celebration, was
psychologically incapacitated to comply with the essential marital obligations of marriage, shall
likewise be void even if such incapacity becomes manifest only after its solemnization.
In Molina, we came up with the following guidelines in the interpretation and application of
Article 36 for the guidance of the bench and the bar:
(1) The burden of proof to show the nullity of the marriage belongs to the plaintiff. Any doubt
should be resolved in favor of the existence and continuation of the marriage and against its
dissolution and nullity. This is rooted in the fact that both our Constitution and our laws cherish the
validity of marriage and unity of the family. . . .
(2) The root cause of the psychological incapacity must be: (a) medically or clinically
identified, (b) alleged in the complaint, (c) sufficiently proven by experts and (d) clearly explained
in the decision. Article 36 of the Family Code requires that the incapacity must be psychological —
not physical, although its manifestations and/or symptoms may be physical. The evidence must
convince the court that the parties, or one of them, was mentally or psychically ill to such an
extent that the person could not have known the obligations he was assuming, or knowing them,
could not have given valid assumption thereof. Although no example of such incapacity need be
given here so as not to limit the application of the provision under the principle of ejusdem generis
(Salita vs. Magtolis, 233 SCRA 100, June 13, 1994), nevertheless such root cause must be identified
as a psychological illness and its incapacitating nature fully explained. Expert evidence may be
given by qualified psychiatrists and clinical psychologists.
(3) The incapacity must be proven to be existing at "the time of the celebration" of the
marriage. The evidence must show that the illness was existing when the parties exchanged their "I
do's." The manifestation of the illness need not be perceivable at such time, but the illness itself
must have attached at such moment, or prior thereto.
(4) Such incapacity must also be shown to be medically or clinically permanent or incurable.
Such incurability may be absolute or even relative only in regard to the other spouse, not
necessarily absolutely against everyone of the same sex. Furthermore, such incapacity must be
relevant to the assumption of marriage obligations, not necessarily to those not related to
marriage, like the exercise of a profession or employment in a job. Hence, a pediatrician may be
effective in diagnosing illnesses of children and prescribing medicine to cure them but may not be
psychologically capacitated to procreate, bear and raise his/her own children as an essential
obligation of marriage.
(5) Such illness must be grave enough to bring about the disability of the party to assume the
essential obligations of marriage. Thus, “mild characteriological peculiarities, mood changes,
occasional emotional outbursts” cannot be accepted as root causes. The illness must be shown as
downright incapacity or inability, not a refusal, neglect or difficulty, much less ill will. In other
words, there is a natal or supervening disabling factor in the person, an adverse integral element in
the personality structure that effectively incapacitates the person from really accepting and
thereby complying with the obligations essential to marriage.
(6) The essential marital obligations must be those embraced by Articles 68 up to 71 of the
Family Code as regards the husband and wife as well as Articles 220, 221 and 225 of the same Code
in regard to parents and their children. Such non-complied marital obligation(s) must also be stated
in the petition, proven by evidence and included in the text of the decision.
(7) Interpretations given by the National Appellate Matrimonial Tribunal of the Catholic Church
in the Philippines, while not controlling or decisive, should be given great respect by our courts. . .
(8) The trial court must order the prosecuting attorney or fiscal and the Solicitor General to
appear as counsel for the state. No decision shall be handed down unless the Solicitor General
issues a certification, which will be quoted in the decision, briefly stating therein his reasons for his
agreement or opposition, as the case may be, to the petition. The Solicitor-General, along with the
prosecuting attorney, shall submit to the court such certification within fifteen (15) days from the
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date the case is deemed submitted for resolution of the court. The Solicitor-General shall discharge
the equivalent function of the defensor vinculi contemplated under Canon 1095.
The guidelines incorporate the three basic requirements earlier mandated by the Court in
Santos: "psychological incapacity must be characterized by (a) gravity (b) juridical antecedence and
(c) incurability." The foregoing guidelines do not require that a physician examine the person to be
declared psychologically incapacitated. In fact, the root cause may be “medically or clinically
identified.” What is important is the presence of evidence that can adequately establish the party’s
psychological condition. For indeed, if the totality of evidence presented is enough to sustain a
finding of psychological incapacity, then actual medical examination of the person concerned need
not be resorted to.
We find that the totality of evidence presented fell short of proving that Toshio was
psychologically incapacitated to assume his marital responsibilities. Toshio’s act of abandonment
was doubtlessly irresponsible but it was never alleged nor proven to be due to some kind of
psychological illness. After respondent testified on how Toshio abandoned his family, no other
evidence was presented showing that his behavior was caused by a psychological disorder.
Although, as a rule, there was no need for an actual medical examination, it would have greatly
helped respondent’s case had she presented evidence that medically or clinically identified his
illness. This could have been done through an expert witness. This respondent did not do.
According to the appellate court, the requirements in Molina and Santos do not apply here
because the present case involves a “mixed marriage,” the husband being a Japanese national. We
disagree. In proving psychological incapacity, we find no distinction between an alien spouse and a
Filipino spouse. We cannot be lenient in the application of the rules merely because the spouse
alleged to be psychologically incapacitated happens to be a foreign national. The medical and
clinical rules to determine psychological incapacity were formulated on the basis of studies of
human behavior in general. Hence, the norms used for determining psychological incapacity should
apply to any person regardless of nationality.
Property Regime of Unions without Marriage; Elements for application of Article 147 of the
Family Code
ELNA MERCADO-FEHR vs. BRUNO FEHR

[G.R. No. 152716. October 23, 2003]
PUNO
FACTS: A petition for declaration of nullity of marriage on the ground of psychological incapacity
for inability to comply with the essential marital obligations under Article 36 of the Family Code
was filed by petitioner Elna Mercado-Fehr against respondent Bruno Fehr before the RTC. The RTC
declared the marriage between petitioner and respondent void ab initio and ordered the dissolution
of their conjugal partnership of property and in lieu thereof established a regime of complete
separation of property between the said spouses in accordance with the pertinent provisions of the
Family Code. As a consequence of which, an order was issued declaring a condominium unit as the
exclusive property of the respondent considering that the same was purchased by respondent with
his exclusive funds prior to his marriage. Petitioner filed a Motion for Reconsideration of said order
alleging that the condominium unit was purchased on installment basis at the time when petitioner
and respondent were living exclusively with each other as husband and wife without the benefit of
marriage, hence the rules on co-ownership should apply in accordance with Article 147 of the
Family Code. Resolving said motion, the RTC held that since the marriage between petitioner and
respondent was declared void ab initio, the rules on co-ownership should apply in the liquidation
and partition of the properties they owned in common pursuant to Article 147 of the Family Code.
The court, however, noted that the parties have already agreed in principle to divide the
properties and/or proceeds from the sale thereof proportionately among them and their children as
follows: 1/3 for petitioner, 1/3 for respondent and 1/3 for the children. It also affirmed its
previous ruling that the condominium unit was acquired prior to the couple's cohabitation and
therefore pertained solely to respondent. The CA dismissed the petition for certiorari filed by
petitioner for lack of merit. Hence, this petition.

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ISSUES:
1. Is the condominium unit an exclusive property of respondent?
2. Will Article 147 of the Family Code applying the rules on co-ownership apply?
HELD: 1. NO. It appears from the facts, as found by the RTC, after two years of long-distance
courtship, petitioner moved in with respondent in the latter's residence in Metro Manila. Their
relations bore fruit and their first child, Michael Bruno Fehr, was born on December 3, 1983. The
couple got married on March 14, 1985. Prior to their marriage, they purchased on installment the
condominium unit, as evidenced by a Contract to Sell dated July 26, 1983. Petitioner also signed
the contract as witness and upon completion of payment, the title to the condominium unit was
issued in the name of petitioner.
In light of these facts, we give more credence to petitioner's submission that the condominium unit
was acquired during the parties' cohabitation.
2. YES. Under Article 147 of the Family Code, the property regime of the parties should be
governed by the rules on co-ownership.
Article 147 applies to unions of parties who are legally capacitated and not barred by any
impediment to contract marriage, but whose marriage is nonetheless void, as in the case at bar.
This provision creates a co-ownership with respect to the properties they acquire during their
cohabitation.
Thus, for Article 147 to operate, the man and the woman: (1) must be capacitated to marry
each other; (2) live exclusively with each other as husband and wife; and (3) their union is without
the benefit of marriage or their marriage is void. All these elements are present in the case at bar.
It has not been shown that petitioner and respondent suffered any impediment to marry each
other. They lived exclusively with each other as husband and wife when petitioner moved in with
respondent in his residence and were later united in marriage. Their marriage, however, was found
to be void under Article 36 of the Family Code because of respondent's psychological incapacity to
comply with essential marital obligations.
There is nothing in the records that support the pronouncement of the trial court that the
parties have agreed to divide the properties into three — 1/3 share each to the petitioner, the
respondent and their children. Petitioner, in fact, alleges in her petition before this Court that the
parties have agreed on a four-way division of the properties — 1/4 share each to the petitioner and
the respondent, and 1/4 share each to their two children. Moreover, respondent's argument that
the three-way partition is in accordance with Articles 50 and 51 of the Family Code does not hold
water as said provisions relate only to voidable marriages and exceptionally to void marriages under
Article 40 of the Family Code, i.e., the declaration of nullity of a subsequent marriage contracted
by a spouse of a prior void marriage before the latter is judicially declared void.
Donation Propter Nuptias; Form of Donations; Acceptance of Donation
ROMANA VALENCIA, ET. AL. vs. BENITO A. LOCQUIAO

[G.R. No. 122134. October 3, 2003.]
TINGA
FACTS: This petition is a consolidation of two cases involving an action for annulment of title and
an action for ejectment. These cases involve a parcel of land originally owned by the spouses
Herminigildo and Raymunda Locquiao as evidenced by an original certificate of title.
On May 22, 1944, a deed of donation propter nuptias, written in Ilocano and denominated
as Inventario Ti Sagut was executed by Herminigildo and Raymunda Locquiao in favor of their son,
respondent Benito Locquiao and his prospective bride, respondent Tomasa Mara.
By the terms of the deed, four parcels of land, including the land in question as well as a
male cow and one-third (1/3) portion of the conjugal house of the donor parents were given to the
donees in consideration of their impending marriage.

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On June 4, 1944, the donees were married and this was inscribed in the certificate of title.
But it was only on May 15, 1970 that the respondents Benito and Tomasa registered the Inventario
Ti Sagut with the Register of Deeds. As a consequence thereof, the original title was cancelled and
in lieu thereof a transfer certificate of title in the name of the respondents Benito and Tomasa was
issued.
When Herminigildo and Raymunda died, they left as heirs their six children namely:
respondent Benito, Marciano, Lucio, Emeteria, Anastacia and petitioner Romana. With the
permission of respondents Benito and Tomasa, Petitioner Romana took possession and cultivated
the subject land and when Romana’s husband died, her daughter petitioner Constancia took over
and possessed the land.
On March 18, 1973, all the heirs of the Locquiao spouses executed a Deed of Partition with
Recognition of Rights wherein they distributed among only three of them the twelve parcels of land
left by their parents excluding the subject land and other lots disposed of by the Locquiao spouses
earlier. The said deed contained a statement that respondent Benito and Marciano Locquiao along
with the heirs of Lucio Locquiao have already received their shares by virtue of previous donations
and conveyances. All the living children of the Locquiao spouses at the time, including petitioner
Romana confirmed the previous dispositions and waived their right to whomsoever the properties
covered by the deed of partition were adjudicated.
Later on, disagreements among the five heirs including petitioner Romana concerning the
distribution of the two lots covered by the deed of partition arose. After the matters were settled,
the heirs concerned executed a Deed of Compromise Agreement which provided for the re-
distribution of the two lots. Although not involved, Benito also signed the compromise agreement.
All the signatories to the compromise agreement confirmed all the other stipulations and provisions
of the deed of partition.
Sometime in 1983, petitioner Constancia filed an action for annulment of the title against
respondents. On December 13, 1983, respondent instituted a complaint seeking the ejectment of
petitioner Constancia from the subject property. The Municipal Trial Court ordered petitioner
Constancia to vacate the land.
Petitioners Romana and Constancia countered with a complaint for the annulment of the
transfer certificate of title against respondents Benito and Tomasa specifically attacking the
validity of the donation propter nuptias on the ground that the donee’s failure to accept the
donation in public instrument renders it void.
After trial, the court a quo dismissed the complaint for annulment of title on the ground of
prescription and laches and affirmed the decision of the MTC in the ejectment case. The Court of
Appeals affirmed the above decision.
Hence, this petition.
ISSUE: Is express acceptance required for the validity of donations propter nuptias?
HELD: NO. Unlike ordinary donations, donations propter nuptias or donations by reason of
marriage are those “made before its celebration, in consideration of the same and in favor of one
or both of the future spouses”. The distinction is crucial because the two classes of donations are
not governed by exactly the same rules, especially as regards the formal essential requisites.
Under the Old Civil Code, donations propter nuptias must be made in a public instrument in
which the property donated must be specifically described. However, in Article 1330 of the same
Code, provides that “acceptance is not necessary to the validity of such gifts”. In other words, the
celebration of the marriage between the beneficiary couple, in tandem with compliance with the
prescribed form, was enough to effectuate the donation propter nuptias under the Old Civil Code.
Under the New Civil Code, the rules are different. Article 127 thereof provides that the
form of donations propter nuptias are regulated by the Statute of Frauds. Article 1403, paragraph
2, which contains the Statute of Frauds requires that the contracts mentioned thereunder need be
in writing only to be enforceable. However, as provided in Article 129, express acceptance “is not
necessary for the validity of these donations”. Thus, implied acceptance is sufficient.
The pivotal question, therefore, is which formal requirements should be applied with
respect to the donation propter nuptias at hand. Those under the Old Civil Code or the New Civil
Code?

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It is settled that only laws existing at the time of the execution of a contract are applicable
thereto and not later statutes, unless the latter are specifically intended to have retroactive
effect. Consequently, it is the Old Civil Code which applies in this case since the donation propter
was executed in 1944 and the New Civil Code took effect only on August 30, 1950. As a
consequence, applying Article 1330 of the Old Civil Code in the determination of the validity of the
questioned donation, it does not matter whether or not the donees had accepted the donation. The
validity of the donation is unaffected in either case.
Adoption; Withdrawal of right of adopter to cancel adoption after R.A. 8852
ISABELITA S. LAHOM vs. JOSE MELVIN SIBULO

[G.R. No. 143989. July 14, 2003.]
VITUG
FACTS: In 1971 Dr. and Mrs. Lahom filed a petition for the adoption of Jose Melvin. On 05 May
1972, the court granted the petition and ordered the Civil Registrar of Naga City to change the
name "Jose Melvin Sibulo" to "Jose Melvin Lahom."
Unfortunately, in December of 1999, Mrs. Lahom commenced a petition to rescind the
decree.
Prior to the institution of the case, specifically on 22 March 1998, Republic Act (R.A.) No.
8552, also known as the Domestic Adoption Act, went into effect. The new statute deleted from
the law the right of adopters to rescind a decree of adoption.
Jose Melvin moved for the dismissal of the petition, contending principally (a) that the trial
court had no jurisdiction over the case and (b) that the petitioner had no cause of action in view of
the aforequoted provisions of R.A. No. 8552. However, Petitioner asseverated, by way of
opposition, that the proscription in R.A. No. 8552 should not retroactively apply, i.e., to cases
where the ground for rescission of the adoption vested under the regime of then Article 348 of the
Civil Code and Article 192 of the Family Code.
The trial court dismissed the petition ruling that Section 19, Article VI of RA No. 8552
deleted the right of an adopter to rescind an adoption earlier granted under the Family Code.
Further, it ruled that even assuming that petitioner is entitled to rescind the adoption, said right
should have been exercised within the period allowed by the Rules. From the averments in the
petition, it appears clear that the legal grounds for the petition have been discovered and known to
petitioner for more than five (5) years, prior to the filing of the instant petition on December 1,
1999, hence, the action if any, had already prescribed. (Sec. 5, Rule 100 Revised Rules of Court)
ISSUE: Whether the subject adoption, decreed on May 05 1972, may still be rescinded by an
adopter after the effectivity of RA No. 8852?
HELD: NO. It was months after the effectivity of R.A. No. 8552 that herein petitioner filed an
action to revoke the decree of adoption granted in 1975. By then, the new law, had already
abrogated and repealed the right of an adopter under the Civil Code and the Family Code to rescind
a decree of adoption. Consistently with its earlier pronouncements, the Court should now hold that
the action for rescission of the adoption decree, having been initiated by petitioner after R.A. No.
8552 had come into force, no longer could be pursued.
While R.A. No. 8552 has unqualifiedly withdrawn from an adopter a consequential right to
rescind the adoption decree even in cases where the adoption might clearly turn out to be
undesirable, it remains, nevertheless, the bounden duty of the Court to apply the law. Dura lex sed
lex would be the hackneyed truism that those caught in the law have to live with. It is still
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noteworthy, however, that an adopter, while barred from severing the legal ties of adoption, can
always for valid reasons cause the forfeiture of certain benefits otherwise accruing to an
undeserving child. For instance, upon the grounds recognized by law, an adopter may deny to an
adopted child his legitime and, by a will and testament, may freely exclude him from having a
share in the disposable portion of his estate.
PROPERTY
Forcible Entry; Collateral Attack on the Validity of the Deed of Absolute Sale in an Ejectment
Proceeding
JESUS DELA ROSA AND LUCILA DELA ROSA vs. SANTIAGO CARLOS AND TEOFILA PACHECO
[G.R. No. 147549, October 23, 2003.]
CARPIO
FACTS: In their complaint for forcible entry, petitioner Spouses Dela Rosa alleged that they are the
owners of a house and lot in Bulacan by virtue of a Deed of Absolute Sale executed between
petitioner Spouses and Leonardo Carlos on 1 September 1966, and thereafter registered the sale on
6 October 1966 under Act No. 3344 with the Register of Deeds of Bulacan. Petitioners likewise
asserted that they renovated the house, furnished and occupied the same from 1966 up to the
present. Furthermore, they alleged that they had been paying the taxes for the land from 1966 to
1977 and for the house from 1966 to 1993; and that they had a perimeter fence built to separate
the property from the municipal road and to protect it from trespassers.
However, they discovered that sometime in October 1997, respondents Santiago Carlos and
Teofila Pacheco had built a house of strong materials on a vacant lot of the property through
stealth and without their knowledge and consent.
On the other hand, respondents averred in their answer that they had been occupying the
lot in the concept of a co- owner since birth as they are the alleged surviving heirs of the Spouses
Leonardo and Benita Carlos. Furthermore, they contended that petitioners were never in possession
of the property because the latter only went there to visit their parents and not as owners.
The Municipal Trial Court rendered judgment in favor of petitioners. The same was
affirmed by the Regional Trial Court. However, the Court of Appeals reversed said judgment in light
among others of the failure of petitioners to prove prior possession of the property and of the fact
that assuming the validity of the sale, the latter will only apply to Leonardo’s share and not that of
Benita’s. Hence, this petition with the Court.
ISSUES:
1. Were petitioners in possession of the property notwithstanding their absence therefrom
most of the time?
2. Can the validity of the Deed of Sale be assailed in ejectment cases?
HELD: 1. YES. In a forcible entry case, the principal issue for resolution is mere physical or
material possession (possession de facto) and not juridical possession (possession de jure) nor
ownership of the property involved.
In the case at bar, Santiago and Teofila admit that the Spouses Dela Rosa visit the Property. Visiting
the Property on weekends and holidays is evidence of actual or physical possession. Even if the
Spouses Dela Rosa were already residing in Manila, they could continue possessing the Property in
Bulacan. The fact of their residence in Manila, by itself, does not result in loss of possession of the
Property in Bulacan. The law does not require one in possession of a house to reside in the house to
maintain his possession.

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Renovating the house, furnishing the same and constructing a perimeter fence around the
property are acts of dominion, which are clear indications that the Spouses Dela Rosa were in
possession of the Property. Santiago and Teofila failed to explain convincingly how the Spouses Dela
Rosa were able to renovate, furnish the house and construct a perimeter fence around the Property
without physically possessing the Property. It is quite improbable to perform these acts without the
Spouses Dela Rosa physically possessing the Property.
2. NO. The sale transpired on 1 September 1966, before Leonardo's death. The Spouses
Dela Rosa registered on 6 October 1966 the Deed of Sale under Act No. 3344 with the Registry of
Deeds of Paombong, Bulacan. If Santiago and Teofila truly believed that the Deed of Sale is void,
they should have filed an action to annul the same, but they did not. Santiago and Teofila
questioned the validity of the Deed of Sale only when the Spouses Dela Rosa filed the forcible entry
case.
However, Santiago and Teofila cannot properly challenge the validity of the Deed of Sale in
the ejectment case because ejectment cases proceed independently of any claim of ownership.
Santiago and Teofila claim that the Deed of Sale was executed without the consent of Benita,
Leonardo's spouse. They also claim that the Deed of Sale was executed through fraud and undue
influence. However, these issues cannot properly be addressed in the present action. These issues
can only be resolved in a separate action specifically for the annulment of the Deed of Sale.
Resolution of these issues, in turn, will determine whether the surviving heirs of the Spouses Carlos
are co-owners of the Property who are likewise entitled to its possession.
In Ejectment Cases, Pari Delicto does not apply

CREDIT TRANSACTIONS: Commodatum
COLITO T. PAJUYO vs. COURT OF APPEALS, ET AL.

[G.R. No. 146364. June 3, 2004.]
CARPIO
FACTS: In June 1979, Colito T. Pajuyo (“Pajuyo”) paid P400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. He then constructed a house made of
light materials on the lot and lived in the house with his family from 1979 to 7 December 1985.
Petitioner and private respondent Eddie Guevarra ("Guevarra") executed a Kasunduan or
agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free provided
Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he
would voluntarily vacate the premises on Pajuyo's demand. In 1994, Pajuyo informed Guevarra of
his need of the house and demanded to vacate the house. Guevarra refused. Pajuyo filed an
ejectment case against Guevarra with the Metropolitan Trial Court.
In his Answer, Guevarra asserted that Pajuyo had no valid title or right of possession over
the lot where the house stands because the lot is within the 150 hectares set aside by Proclamation
No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September 1994,
Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has
valid title to the lot.
The MTC rendered its decision in favor of Pajuyo. The aforesaid decision was affirmed on
appeal by the RTC.
The Court of Appeals, in reversing the decision of the RTC, declared that both Pajuyo and
Guevarra were squatters and were illegally occupying the contested lot which was owned by the
government. From the foregoing, it ruled that both of them were consequently in pari delicto -
Pajuyo being well aware that he acquired his rights to the lot from Perez who was also a squatter,
and Guevarra who knew these facts – and should be left where they are. Furthermore, the
appellate court also ruled that the contract entered into by the parties was not lease but
commodatum since the agreement was not for a price certain.

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ISSUES:
1. Is the doctrine of pari delicto applicable in the present ejectment case?
2. Is Pajuyo entitled to the physical possession of the property?
3. Was the contract properly denominated as commodatum?
HELD: 1. NO. The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims 'ex dolo malo non eritur actio' and 'in
pari delicto potior est conditio defedentis.' The law will not aid either party to an illegal
agreement. It leaves the parties where it finds them.
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would violate
well-established public policy.
In Drilon v. Gaurana, we reiterated the basic policy behind the summary actions of forcible
entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be turned out by strong hand, violence or terror. In affording this remedy of
restitution the object of the statute is to prevent breaches of the peace and criminal disorder
which would ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal
would create that some advantage must accrue to those persons who, believing themselves entitled
to the possession of property, resort to force to gain possession rather than to some appropriate
action in the courts to assert their claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his.
Clearly, the application of the principle of pari delicto to a case of ejectment between
squatters is fraught with danger. To shut out relief to squatters on the ground of pari delicto would
openly invite mayhem and lawlessness. A squatter would oust another squatter from possession of
the lot that the latter had illegally occupied, emboldened by the knowledge that the courts would
leave them where they are. Nothing would then stand in the way of the ousted squatter from re-
claiming his prior possession at all cost.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent matter
that cannot be left to the squatters to decide. To do so would make squatters receive better
treatment under the law. The law restrains property owners from taking the law into their own
hands. However, the principle of pari delicto as applied by the Court of Appeals would give
squatters free rein to dispossess fellow squatters or violently retake possession of properties
usurped from them. Courts should not leave squatters to their own devices in cases involving
recovery of possession.
2. YES. Pajuyo is entitled to Physical Possession of the Disputed Property. Guevarra does
not dispute Pajuyo's prior possession of the lot and ownership of the house built on it. Guevarra
expressly admitted the existence and due execution of the Kasunduan.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of
rent, but Guevarra was under obligation to maintain the premises in good condition. Guevarra
promised to vacate the premises on Pajuyo's demand but Guevarra broke his promise and refused to
heed Pajuyo's demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the
withholding by a person from another of the possession of real property to which the latter is
entitled after the expiration or termination of the former's right to hold possession under a
contract, express or implied.
Where the plaintiff allows the defendant to use his property by tolerance without any
contract, the defendant is necessarily bound by an implied promise that he will vacate on demand,
failing which, an action for unlawful detainer will lie. The defendant's refusal to comply with the
demand makes his continued possession of the property unlawful. The status of the defendant in

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such a case is similar to that of a lessee or tenant whose term of lease has expired but whose
occupancy continues by tolerance of the owner.
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyo's
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house and
lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate the
property on demand. Guevarra's refusal to comply with Pajuyo's demand to vacate made Guevarra's
continued possession of the property unlawful.
3. NO. We do not subscribe to the Court of Appeals' theory that the Kasunduan is one of
commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. An essential
feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of
the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of
the thing loaned until after expiration of the period stipulated, or after accomplishment of the use
for which the commodatum is constituted. If the bailor should have urgent need of the thing, he
may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor,
he can demand the return of the thing at will, in which case the contractual relation is called a
precarium. Under the Civil Code, precarium is a kind of commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him
to maintain the property in good condition. The imposition of this obligation makes the Kasunduan
a contract different from a commodatum. The effects of the Kasunduan are also different from
that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one
that is akin to a landlord-tenant relationship where the withdrawal of permission would result in
the termination of the lease. The tenant's withholding of the property would then be unlawful.
This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum. These contracts
certainly involve the obligation to deliver or return the thing received.
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also
a squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited
from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra
has a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarra's recognition of Pajuyo's better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Possession; Easement; Laches
BOGO-MEDELLIN MILLING CO., INC. vs. COURT OF APPEALS

[G.R. No. 124699. July 31, 2003.]
CORONA
FACTS: Magdaleno Valdez, Sr., father of herein respondents, purchased a parcel of unregistered
land from Feliciana Santillan in 1935. He then took possession of the property and declared the
property in his name for tax purposes. Prior to the sale however, the subject property had already
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been traversed in the middle by railroad tracks owned by herein petitioner, Bogo-Medellin Milling
Co., Inc. (Bomedco), which they used to haul sugar cane from the fields to petitioner’s sugar mill.
When Valdez, Sr. passed away in 1948, respondents inherited the property. Unknown to them,
however, was that petitioner was able to have the portion of the subject land occupied by the
railroad tracks registered in their name in the Cadastral Survey of Medellin, Cebu in 1965. The
property was divided into three parts, two of which were retained in the name of respondents and
the third in the name of Bomedco, obtaining ownership over the portion where the railroad tracks
were situated.
Upon discovery of the respondents when they conducted an inquiry with the Bureau of
Lands, they filed suit against Bomedco for recovery of possession as well as payment for
compensation with damages after their demands for payment of the property went unheeded by
Bomedco. Respondents averred that what was only granted to Bomedco by Santillan previous to the
sale was a railroad right of way for 30 years, which was also respected by Valdez, Sr. When the
right of way expired sometime in 1959, the heirs still allowed Bomedco to have the right of way, as
one of their siblings was an employee of the said company. In its defense, Bomedco alleged that
they were the owners of the subject portion of the lot, presenting evidence of the deed of sale
between them and Santillan, and that having been in open and continuous possession of the
property for over 50 years, they claim that they have acquired ownership over the property, and
that respondents are now barred by laches from asserting their claim. The trial court ruled in favor
of Bomedco, ruling that it had acquired the property by prescription, but on appeal, the decision
was reversed, stating that the petitioner’s possession of the land had not yet ripened into
ownership. And since there was no showing that petitioner had paid compensation to the
respondents for use of the land, petitioner was also ordered to pay respondents the reasonable
value of the lot as well as attorney’s fees. Hence, the present petition.
ISSUES:
1. Did petitioner acquire ownership over the property by acquisitive prescription?
2. Are respondents are barred by laches in asserting their claim over the property?
3. Did petitioner acquire ownership by possession of a continuous and apparent easement
by prescription under Art. 620 of the Civil Code?
HELD: 1. NO. Petitioner's claim of ownership through extraordinary acquisitive prescription under
Article 1137 of the Civil Code cannot be sustained.
There is no dispute that the controversial strip of land has been in the continuous possession of
petitioner since 1929. But possession, to constitute the foundation of a prescriptive right, must be
possession under a claim of title, that is, it must be adverse. Unless coupled with the element of
hostility towards the true owner, possession, however long, will not confer title by prescription.
After a careful review of the records, we are inclined to believe the version of respondent
heirs that an easement of right of way was actually granted to petitioner for which reason the
latter was able to occupy Cadastral Lot No. 954. We cannot disregard the fact that, for the years
1930, 1937, 1949, 1962 and 1963, petitioner unequivocally declared the property to be a "central
railroad right of way" or "sugar central railroad right of way" in its real estate tax receipts when it
could have declared it to be "industrial land" as it did for the years 1975 and 1985. Instead of
indicating ownership of the lot, the receipts showed that all petitioner had was possession by virtue
of the right of way granted to it. Were it not so and petitioner really owned the land, petitioner
would not have consistently used the phrases "central railroad right of way" and "sugar central
railroad right of way" in its tax declarations until 1963. Certainly an owner would have found no
need for these phrases. A person cannot have an easement on his own land, since all the uses of an
easement are fully comprehended in his general right of ownership.
While it is true that, together with a person's actual and adverse possession of the land, tax
declarations constitute strong evidence of ownership of the land occupied by him, this legal
precept does not apply in cases where the property is declared to be a mere easement of right of
way. Having held the property by virtue of an easement, petitioner cannot now assert that its
occupancy since 1929 was in the concept of an owner. Neither can it declare that the 30-year
period of extraordinary acquisitive prescription started from that year.
After the grant of easement expired in 1959, petitioner never performed any act
incompatible with the ownership of respondent heirs over Cadastral Lot No. 954. On the contrary,
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until 1963, petitioner continued to declare the "sugar central railroad right of way" in its realty tax
receipts, thereby doubtlessly conceding the ownership of respondent heirs. Respondents
themselves were emphatic that they simply tolerated petitioner's continued use of Cadastral Lot
No. 954 so as not to jeopardize the employment of one of their co-heirs in the sugar mill of
petitioner.
The only time petitioner assumed a legal position adverse to respondents' was when it filed
a claim over the property in 1965 during the cadastral survey of Medellin. Since then (1965) and
until the filing of the complaint for the recovery of the subject land before the RTC of Cebu in
1989, only 24 years had lapsed. Since the required 30-year extraordinary prescriptive period had
not yet been complied with in 1989, petitioner never acquired ownership of the subject land.
2. NO. The essence of laches is the failure or neglect, for an unreasonable and unexplained
length of time, to do that which, through due diligence, could or should have been done earlier,
thus giving rise to a presumption that the party entitled to assert it had either abandoned or
declined to assert it.
Its essential elements are: (a) conduct on the part of the defendant, or of one under whom
he claims, giving rise to the situation complained of; (b) delay in asserting complainant's rights
after he had knowledge of defendant's acts and after he has had the opportunity to sue; (c) lack of
knowledge or notice by defendant that the complainant will assert the right on which he bases his
suit; and (d) injury or prejudice to the defendant in the event the relief is accorded to the
complainant.
The second element (which in turn has three aspects) is lacking in the case at bar. These
aspects are: (a) knowledge of defendant's action, (b) opportunity to sue defendant after obtaining
such knowledge and (c) delay in the filing of such suit.
Records show that respondent heirs only learned about petitioner's claim on their property when
they discovered the inscription for the cadastral survey in the records of the Bureau of Lands in
1989. Respondents lost no time in demanding an explanation for said claim in their letters to the
petitioner dated March 1, 1989 and April 6, 1989. When petitioner ignored them, they instituted
their complaint before the Regional Trial Court of Cebu City on June 8, 1989.
Further, there is no absolute rule on what constitutes laches. It is a rule of equity and
applied not to penalize neglect or sleeping on one's rights but rather to avoid recognizing a right
when to do so would result in a clearly unfair situation.
It is clear that petitioner never acquired ownership over Cadastral Lot No. 954 whether by
extraordinary acquisitive prescription or by laches.
3. NO. In this case, the presence of railroad tracks for the passage of petitioner's trains
denotes the existence of an apparent but discontinuous easement of right of way. And under Article
622 of the Civil Code, discontinuous easements, whether apparent or not, may be acquired only by
title. Unfortunately, petitioner Bomedco never acquired any title over the use of the railroad right
of way whether by law, donation, testamentary succession or contract. Its use of the right of way,
however long, never resulted in its acquisition of the easement because; under Article 622, the
discontinuous easement of a railroad right of way can only be acquired by title and not by
prescription.
To be sure, beginning 1959 when the original 30-year grant of right of way given to
petitioner Bomedco expired, its occupation and use of Cadastral Lot No. 954 came to be by mere
tolerance of the respondent heirs. Thus, upon demand by said heirs in 1989 for the return of the
subject land and the removal of the railroad tracks, or, in the alternative, payment of
compensation for the use thereof, petitioner Bomedco which had no title to the land should have
returned the possession thereof or should have begun paying compensation for its use.
But when is a party deemed to acquire title over the use of such land (that is, title over the
easement of right of way)? In at least two cases, we held that if: (a) it had subsequently entered
into contractual right of way with the heirs for the continued use of the land under the principles
of voluntary easements or (b) it had filed a case against the heirs for conferment on it of a legal
easement of right of way under Article 629 of the Civil Code, then title over the use of the land is

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deemed to exist. The conferment of a legal easement of right of way under Article 629 is subject to
proof of the following:
(1) it is surrounded by other immovables and has no adequate outlet to a public highway;
(2) payment of proper indemnity;
(3) the isolation is not the result of its own acts; and
(4) the right of way claimed is at the point least prejudicial to the servient estate, and,
insofar as consistent with this rule, the distance from the dominant estate to the
highway is the shortest.
None of the above options to acquire title over the railroad right of way was ever pursued
by petitioner despite the fact that simple resourcefulness demanded such initiative, considering the
importance of the railway tracks to its business. No doubt, it is unlawfully occupying and using the
subject strip of land as a railroad right of way without valid title yet it refuses to vacate it even
after demand of the heirs. Furthermore, it tenaciously insists on ownership thereof despite a clear
showing to the contrary.
Possession; Builders in Good Faith; Ownership
PHILIPPINE NATIONAL BANK vs. GENEROSO DE JESUS

[G.R. No. 149295. September 23, 2003]
VITUG
FACTS: In his complaint for recovery of ownership and possession, respondent averred that he had
acquired a parcel of land situated in Mamburao, Occidental Mindoro, with an area of 1,144 square
meters covered by TCT No. T-17197; and that after a verification survey of the property, he
discovered that the northern portion of the lot was being encroached upon by a building of
petitioner to the extent of 124 square meters. Despite two letters of demand sent by respondent,
petitioner failed and refused to vacate the area.
Petitioner, in its answer, asserted that when it acquired the lot and the building sometime in 1981
from then Mayor Ignacio, the encroachment already was in existence and to remedy the situation,
Mayor Ignacio offered to sell the area in question (which then also belonged to Ignacio) to
petitioner at P100.00 per square meter which offer the latter claimed to have accepted. The sale,
however, did not materialize when, without the knowledge and consent of petitioner, Mayor
Ignacio later mortgaged the lot to the Development Bank of the Philippines.
The RTC decided the case in favor of respondent declaring him to be the rightful owner of the
disputed 124-square-meter portion of the lot and ordered petitioner to surrender possession of the
property to respondent and to cause, at its expense, the removal of any improvement thereon. The
Court of Appeals sustained the above decision of the court a quo.
ISSUES:
1. Is the petitioner a builder in good faith over the encroached property in question?
2. Is Article 448 applicable in the instant case?
HELD: 1. NO. Good faith, here understood, is an intangible and abstract quality with no technical
meaning or statutory definition, and it encompasses, among other things, an honest belief, the
absence of malice and the absence of design to defraud or to seek an unconscionable advantage.
An individual's personal good faith is a concept of his own mind and, therefore, may not
conclusively be determined by his protestations alone. It implies honesty of intention, and freedom
from knowledge of circumstances which ought to put the holder upon inquiry. The essence of good
faith lies in an honest belief in the validity of one's right, ignorance of a superior claim, and
absence of intention to overreach another. Applied to possession, one is considered in good faith if
he is not aware that there exists in his title or mode of acquisition any flaw which invalidates it.
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Given the findings of both the trial court and the appellate court, it should be evident enough that
petitioner would fall much too short from its claim of good faith. Evidently, petitioner was quite
aware, and indeed advised, prior to its acquisition of the land and building from Ignacio that a part
of the building sold to it stood on the land not covered by the land conveyed to it.
2. NO. The building, constructed on the land by Ignacio, has in actuality been part of the
property transferred to petitioner. Article 448, of the Civil Code refers to a piece of land whose
ownership is claimed by two or more parties, one of whom has built some works (or sown or
planted something) and not to a case where the owner of the land is the builder, sower, or planter
who then later loses ownership of the land by sale or otherwise for, elsewise stated, "where the
true owner himself is the builder of works on his own land, the issue of good faith or bad faith is
entirely irrelevant."
Action for Recovery of Possession and Turn over of undivided portion of a Common Property
before partition
MANUEL T. DE GUIA vs. COURT OF APPEALS

[G.R. No. 120864. October 8, 2003.]
CARPIO
FACTS: The subject of the dispute are two undivided parcels of land used as a fishpond situated in
Barrio Ubihan, Meycauayan, Bulacan, originally co-owned by Primitiva Lejano and Lorenza Araniego
married to Juan Abejo. The FISHPOND has a total land area of approximately 79,220 square meters.
Private respondent Abejo is seeking to recover possession of the ½ undivided portion of the
FISHPOND containing 39,611 square meters from herein plaintiff de Guia.
It appears that Teofilo Abejo, as the only heir of Lorenza Araniego married to Juan Abejo, inherited
the undivided ½ portion of the fishpond.
Sometime in 1974, the entire fishpond was leased to Aniano Victa and herein plaintiff by
Primitiva Lejano, with the consent of Teofilo Abejo. The said contract of lease embodied in a
document captioned Salin ng Pamumusisyon ng Palaisdaan ("Lease Contract") was to be affective
from 30 July 1974 up to 30 November 1979.
On November 22, 1983, Teofilo Abejo sold his ½ undivided share of the fishpond to his son,
herein private respondent.
De Guia however continued to possess the entire FISHPOND and to derive income from the
property despite the expiration of the Lease Contract and several demands to vacate made by
Teofilo Abejo and by his successor-in-interest, herein private respondent. It is in this context that
private respondent filed a complaint against petitioner for recovery of possession with damages. In
his answer, De Guia contended that a co-owner cannot claim a definite portion from the property
owned in common until there is a partition. De Guia argues that Abejo should have filed an action
for partition instead of recovery of possession since the court cannot implement any decision in the
latter case without first a partition.
After trial on the merits, the court a quo rendered a decision in favor of private
respondent. On appeal, the above decision was affirmed by the Court of Appeals who debunked De
Guia's claim that partition and not recovery of possession was the proper remedy under the
circumstances. The Court of Appeals pointed out that petitioner's failure to respect private
respondent's right over his ½ undivided share in the FISHPOND justifies the action for recovery of
possession. The trial court's decision effectively enforces ABEJO's right over the property which DE
GUIA violated by possession and use without paying compensation.
ISSUE: Was the action for recovery of possession and turn-over of the ½ undivided portion of a
common property proper before partition?
HELD: NO. Under Article 484 of the Civil Code, "there is co-ownership whenever the ownership of
an undivided thing or right belongs to different persons." A co-owner of an undivided parcel of land
is an "owner of the whole, and over the whole he exercises the right of dominion, but he is at the
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same time the owner of a portion which is truly abstract." On the other hand, there is no co-
ownership when the different portions owned by different people are already concretely
determined and separately identifiable, even if not yet technically described.
Article 487 of the Civil Code provides, "any one of the co-owners may bring an action in
ejectment." This article covers all kinds of actions for the recovery of possession. Article 487
includes forcible entry and unlawful detainer (accion interdictal), recovery of possession (accion
publiciana), and recovery of ownership (accion de reivindicacion).
Any co-owner may file an action under Article 487 not only against a third person, but also
against another co-owner who takes exclusive possession and asserts exclusive ownership of the
property. In the latter case, however, the only purpose of the action is to obtain recognition of the
co-ownership. The plaintiff cannot seek exclusion of the defendant from the property because as
co-owner he has a right of possession. The plaintiff cannot recover any material or determinate
part of the property.
In Hermogena G. Engreso with Spouse Jose Engreso v. Nestoria De La Cruz and Herminio De
La Cruz, we reiterated the rule that a co-owner cannot recover a material or determinate part of a
common property prior to partition as follows:
It is a basic principle in civil law that before a property owned in common is actually
partitioned, all that the co-owner has is an ideal or abstract quota or proportionate share in the
entire property. A co-owner has no right to demand a concrete, specific or determinate part of the
thing owned in common because until division is effected his right over the thing is represented
only by an ideal portion.
Following the inherent and peculiar features of co-ownership, while Abejo and De Guia
have equal shares in the fishpond quantitatively speaking, they have the same right in a qualitative
sense as co-owners. Simply stated, Abejo and De Guia are owners of the whole and over the whole,
they exercise the right of dominion. However, they are at the same time individual owners of a ½
portion, which is truly abstract because until there is partition, such portion remains indeterminate
or unidentified. As co-owners, Abejo and De Guia may jointly exercise the right of dominion over
the entire fishpond until they partition the fishpond by identifying or segregating their respective
portions.
Since a co-ownership subsists between Abejo and De Guia, judicial or extra-judicial
partition is the proper recourse. An action to demand partition is imprescriptible and not subject to
laches. Each co-owner may demand at any time the partition of the common property unless a co-
owner has repudiated the co-ownership under certain conditions. Neither ABEJO nor DE GUIA has
repudiated the co-ownership under the conditions set by law.
Prescriptive Period of an Action for Reconveyance; Reckoning Point
GOVERNMENT SERVICE INSURANCE SYSTEM vs. EDUARDO M. SANTIAGO

[G.R. No. 155206. October 28, 2003.]
CALLEJO, SR.
FACTS: Deceased spouses Jose C. Zulueta and Soledad Ramos obtained various loans from GSIS
secured by real estate mortgages over parcels of land. The Zuluetas failed to pay their loans to
GSIS and the latter foreclosed the real estate mortgages. The mortgaged properties were sold at
public auction by GSIS. However, not all lots covered by the mortgaged titles were sold. Ninety-one
(91) lots were excluded from the auction since the lots were sufficient to pay for all the mortgage
debts. On November 25, 1975, An Affidavit of Consolidation of Ownership was executed by GSIS
over Zulueta's lots, including the lots which were already excluded from the foreclosure. GSIS sold
the foreclosed properties to Yorkstown Development Corporation which sale was disapproved by
the Office of the President of the Philippines. After defendant GSIS had reacquired the properties
sold to Yorkstown Development Corporation, it began disposing the foreclosed lots including the
excluded ones.
On May 7, 1990, plaintiff Antonio Vic Zulueta, represented by Eduardo M. Santiago, filed a
complaint for reconveyance of real estate against GSIS. Subsequently, Zulueta was substituted by
Santiago as the plaintiff. Upon the death of Santiago, he was substituted by his widow, Rosario
Enriquez Vda. de Santiago, as plaintiff.
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ISSUE: Has the action for reconveyance prescribed?
HELD: NO. The petitioner's defense of prescription is untenable. The petitioner cannot feign
ignorance of the fact that the subject lots were excluded from the sale at public auction. The
petitioner's acts of concealing the existence of these lots, its failure to return them to the Zuluetas
and even its attempt to sell them to a third party is proof of the petitioner's intent to defraud the
Zuluetas and appropriate for itself the subject lots.
Generally, an action for reconveyance of real property based on fraud prescribes in four
years from the discovery of fraud; such discovery is deemed to have taken place upon the issuance
of the certificate of title over the property. Registration of real property is a constructive notice to
all persons and, thus, the four-year period shall be counted therefrom. On the other hand, Article
1456 of the Civil Code provides: “If property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the
person from whom the property comes.“ An action for reconveyance based on implied or
constructive trust prescribes in ten years from the alleged fraudulent registration or date of
issuance of the certificate of title over the property. The general rule that the discovery of fraud is
deemed to have taken place upon the registration of real property because it is considered a
constructive notice to all persons does not apply in this case. It is true that registration under the
Torrens system is constructive notice of title, but Torrens title does not furnish a shield for fraud.
The prescriptive period of the action is to be reckoned from the time plaintiff (then
Eduardo M. Santiago) had actually discovered the fraudulent act of defendant-appellant which was
only in 1989. Plaintiff appellee Eduardo M. Santiago categorically testified that he came to know
that there were 91 excluded lots in Antonio Village which were foreclosed by GSIS and included in
its consolidation of ownership in 1975 when, in 1989, he and Antonio Vic Zulueta discussed it and
he was given by Zulueta a special power of attorney to represent him to recover the subject
properties from GSIS. The complaint for reconveyance was filed barely a year from the discovery of
the fraud. The institution of the action for reconveyance in 1990 was thus well within the
prescriptive period. Having acted in bad faith in securing titles over the subject lots, the petitioner
is a holder in bad faith of certificates of title over the subject lots. The petitioner is not entitled to
the protection of the law for the law cannot be used as a shield for frauds.
LAND, TITLES & DEEDS: Tax declarations are not conclusive proof of title
CONTRACTS: Statute of Frauds applies only to Executory Contracts
SPOUSES MANUEL and CORAZON CAMARA vs. SPOUSES JOSE and PAULINA MALABAO
[G.R. No. 154650. July 31, 2003.]
YNARES-SANTIAGO
FACTS: Respondent Jose Malabao and petitioner Manuel Camara entered into a verbal covenant for
the lease of a portion of respondent’s lot covered by TCT No. 118223 for a period of five years at
the lump sum rate of P20,000. It was agreed that petitioner Camara shall construct on the
property a building of strong materials suited for commercial and residential purposes. Also,
petitioner undertook to reduce their agreement into writing, but the same did not materialize.
Some time thereafter, respondents found out that petitioner had caused to be annotated on their
title an adverse claim of ownership based on fraudulent documents, in particular, an alleged deed
of absolute sale.
It was contended by petitioners that they acquired the portion of the subject property by
sale in consideration of the sum of P80,000 and that the deed of absolute sale was executed
between the parties. That the purchased portion was segregated by a subdivision plan and
thereafter the petitioners declared the property in their name for taxation purposes. Furthermore,
it is also argued by petitioners that the 5-year lease contract is unenforceable, it being covered by
the Statute of Frauds.

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The trial court rendered a decision in favor of the respondents ruling that the agreement
was for a five-year lease and that the deed of absolute sale was null and void. On appeal, the CA
affirmed the decision of the court a quo.
ISSUES:
1. Were petitioners correct in claiming ownership based on the fact that they declared
the property in their names for taxation purposes?
2. Was the five-year lease agreement covered by the Statute of Frauds?
HELD: 1. NO. Petitioners' argument that they have declared the disputed lot in their name and
have paid the realty taxes thereof is unavailing, because tax declarations are not conclusive proof
of title. At best they are merely indicia of a claim of ownership. Thus, it has been held in one case
that a party's declaration of real property, his payment of realty taxes and his designation as owner
of the subject property in the cadastral survey and in the records of the Ministry of Agrarian Reform
Office cannot defeat a certificate of title, which is an absolute and indefeasible evidence of
ownership of the property in favor of the person whose name appears therein.
Moreover, the records disclose that the realty taxes for the years 1991–1995, inclusive,
were paid by petitioners only on October 4, 1995, three (3) years after the instant controversy
arose, thereby putting in doubt their alleged ownership of the subject premises since July 3, 1989.
A belated tax declaration has been held to be indicative of an absence of a real claim of ownership
over the subject land prior to the declaration. Petitioners' attempt to explain this three-year
hiatus as a mere "oversight" is, at best, a lame and unconvincing excuse. It is also significant to
note that the alleged deed of sale was executed only on June 22, 1990.
Along the same vein, it must be stressed that the survey and subdivision plan submitted in
evidence by petitioners are inferior proofs of ownership and cannot prevail over the certificate of
title in the name of respondents, who remain to be recognized as registered owners of the disputed
property.
2. NO. As correctly found by the appellate court, the occupation and construction of the
improvements made by petitioners on the disputed property are clear acts of ratification and
enforcement. In other words, the erection of these structures on the subject lot indicates that the
lease contract was already in effect. The Statute of Frauds applies only to executory and not
completed, executed or partially executed contracts. Thus, where as in this case, one party has
performed his obligation, oral evidence will be admitted to prove the agreement. Furthermore, as
can be gleaned from Exhibit "B" of respondents, the amount of P20,000.00 received on April 21,
1989 was apparently for the rent of a stall. Indeed, the said document expressly states that it is a
receipt for rentals. Petitioners can not now say that the said receipt is proof of an alleged down
payment of the subject lot. Moreover, while there was testimony to the effect that the balance of
P60,000 from the alleged purchase price of P80,000.00 was allegedly paid on July 3, 1989, the
receipt therefore was never presented despite an earlier reservation to do so.
Right to repurchase expropriated properties if the purpose of expropriation is not satisfied

TRUST: Constructive Trusts
HEIRS OF TIMOTEO MORENO & MARIA ROTEA vs. MACTAN-CEBU INT’L AIRPORT AUTHORITY
[G.R. No. 156273. October 15, 2003.]
BELLOSILLO
FACTS: The heirs of Timoteo Moreno and Maria Rotea, petitioners herein, are the successors-in-
interest of the former registered owners of the subject two parcels of land, Lots Nos. 916 and 920.
In 1949 the National Airport Corporation as the predecessor agency of respondent Mactan-
Cebu International Airport Authority (MCIAA) wanted to acquire Lots Nos. 916 and 920 for the
proposed expansion of Lahug Airport. To entice the landowners to cede their properties, the

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government assured them that they could repurchase their lands once Lahug Airport was closed or
its operations transferred to Mactan Airport.
On 16 April 1952, as the negotiations for the purchase of the lots necessary for the
expansion and improvement of Lahug Airport irredeemably broke down, the Civil Aeronautics
Administration as the successor agency of the National Airport Corporation filed a complaint with
the Court of First Instance of Cebu, for the expropriation of Lots Nos. 916 and 920.
On 29 December 1961 the trial court promulgated its Decision in Civil Case No. R-1881
condemning Lots Nos. 916 and 920 and other lots for public use upon payment of just
compensation.
At the end of 1991, or soon after the transfer of Lots Nos. 916 and 920 to MCIAA, Lahug
Airport ceased operations as the Mactan Airport was opened for incoming and outgoing flights.
However, Lots Nos. 916 and 920 which had been expropriated for the extension of Lahug Airport
were not utilized.
Hence, petitioners wrote then President Fidel V. Ramos and the airport manager begging
them for the exercise of their alleged right to repurchase Lots Nos. 916 and 920, but their pleas
were not heeded.
Petitioners filed a complaint for reconveyance and damages with the RTC against
respondent MCIAA. Petitioners averred that they had been convinced by the officers of the
predecessor agency of respondent MCIAA not to oppose the expropriation proceedings since in the
future they could repurchase the properties if the airport expansion would not push through.
The trial court granted petitioners the right to repurchase the properties at the amount
pegged as just compensation.
The Court of Appeals reversed the assailed Decision on the ground that the judgment of
condemnation in the Civil Case No. R-1881 was unconditional so that the rights gained therefrom by
respondent MCIAA were indicative of ownership in fee simple.
ISSUES:
1. Do petitioners have the right to repurchase the expropriated properties since the
purpose for the same did not materialize?
2. Was an implied trust was created between petitioners and the government?
HELD: 1. YES. While the trial court in Civil Case No. R-1881 could have simply acknowledged the
presence of public purpose for the exercise of eminent domain regardless of the survival of Lahug
Airport, the trial court in its Decision chose not to do so but instead prefixed its finding of public
purpose upon its understanding that "Lahug Airport will continue to be in operation." Verily, these
meaningful statements in the body of the Decision warrant the conclusion that the expropriated
properties would remain to be so until it was confirmed that Lahug Airport was no longer "in
operation." This inference further implies two (2) things: (a) after the Lahug Airport ceased its
undertaking as such and the expropriated lots were not being used for any airport expansion
project, the rights vis-à-vis the expropriated Lots Nos. 916 and 920 as between the State and their
former owners, petitioners herein, must be equitably adjusted; and, (b) the foregoing unmistakable
declarations in the body of the Decision should merge with and become an intrinsic part of the fallo
thereof which under the premises is clearly inadequate since the dispositive portion is not in accord
with the findings as contained in the body thereof.
Significantly, in light of the discussion above, the admission of petitioners during the pre-
trial of Civil Case No. CEB-20015 for reconveyance and damages that respondent MCIAA was the
absolute owner of Lots Nos. 916 and 920 does not prejudice petitioners' interests. This is as it
should be not only because the admission concerns a legal conclusion fiercely debated by the
parties 32 but more so since respondent was truly the absolute owner of the realties until it was
apparent that Lahug Airport had stopped doing business.
Mactan-Cebu International Airport Authority is correct in stating that one would not find an
express statement in the Decision in Civil Case No. R-1881 to the effect that "the condemned lot
would return to the landowner or that the landowner had a right to repurchase the same if the
(Sales and Lease),
Law)
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purpose for which it was expropriated is ended or abandoned or if the property was to be used
other than as the Lahug Airport." This omission notwithstanding, and while the inclusion of this
pronouncement in the judgment of condemnation would have been ideal, such precision is not
absolutely necessary nor is it fatal to the cause of petitioners herein. No doubt, the return or
repurchase of the condemned properties of petitioners could be readily justified as the manifest
legal effect or consequence of the trial court's underlying presumption that "Lahug Airport will
continue to be in operation" when it granted the complaint for eminent domain and the airport
discontinued its activities.
2. YES. The predicament of petitioners involves a constructive trust, one that is akin to the
implied trust referred to in Art. 1454 of the Civil Code, "If an absolute conveyance of property is
made in order to secure the performance of an obligation of the grantor toward the grantee, a
trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor
when it becomes due, he may demand the reconveyance of the property to him." In the case at
bar, petitioners conveyed Lots Nos. 916 and 920 to the government with the latter obliging itself to
use the realties for the expansion of Lahug Airport; failing to keep its bargain, the government can
be compelled by petitioners to reconvey the parcels of land to them, otherwise, petitioners would
be denied the use of their properties upon a state of affairs that was not conceived nor
contemplated when the expropriation was authorized.
In constructive trusts, the arrangement is temporary and passive in which the trustee's sole
duty is to transfer the title and possession over the property to the plaintiff-beneficiary. Of course,
the "wronged party seeking the aid of a court of equity in establishing a constructive trust must
himself do equity."
The rights and obligations between the constructive trustee and the beneficiary, in this
case, respondent MCIAA and petitioners over Lots Nos. 916 and 920, are echoed in Art. 1190 of the
Civil Code, "When the conditions have for their purpose the extinguishment of an obligation to give,
the parties, upon the fulfillment of said conditions, shall return to each other what they have
received . . . In case of the loss, deterioration or improvement of the thing, the provisions which,
with respect to the debtor, are laid down in the preceding article shall be applied to the party who
is bound to return."
Hence, respondent MCIAA as representative of the State is obliged to reconvey Lots Nos. 916 and
920 to petitioners who shall hold the same subject to existing liens thereon, i.e., leasehold right of
DPWH. In return, petitioners as if they were plaintiff-beneficiaries of a constructive trust must
restore to respondent MCIAA what they received as just compensation for the expropriation of Lots
Nos. 916 and 920 in Civil Case No. R-1881, i.e., P7,065 for Lot No. 916 and P9,291.00 for Lot No.
920 with consequential damages by way of legal interest from 16 November 1947. Petitioners must
likewise pay respondent MCIAA the necessary expenses it may have incurred in sustaining the
properties and the monetary value of its services in managing them to the extent that petitioners
will be benefited thereby. The government however may keep whatever income or fruits it may
have obtained from the parcels of land, in the same way that petitioners need not account for the
interests that the amounts they received as just compensation may have earned in the meantime.
As a matter of justice and convenience, the law considers the fruits and interests as the equivalent
of each other.
HLURB, the fact that the lot had no separate TCT did not make it less a subdivision entitled to
the protection of P.D. 957; Aim Of P.D. 957
FAR EAST BANK & TRUST CO. vs. ARTURO L. MARQUEZ

[G.R. No. 147964. January 20, 2004.]
PANGANIBAN
FACTS: On 13 March 1989, respondent Marquez entered into a Contract to Sell with Transamerican
Sales and Exposition (TSE), through the latter's Owner/General Manager Engr. Jesus Garcia,
involving a 52.5 sq. m. lot covered by TCT No. 156254 (now TCT No. 383697) in Diliman, Quezon
City with a three-storey townhouse unit to be constructed thereon for a total consideration of
P800,000.00. On 22 May 1989, TSE obtained a loan from petitioner FEBTC in the amount of
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P7,650,000.00 and mortgaged the property covered by TCT No. 156254. For failure of TSE to pay its
obligation, petitioner FEBTC extrajudicially foreclosed the real estate mortgage and became the
highest bidder in the auction sale. Respondent had already paid a total of P600,000.00 when he
stopped payment because the construction of his townhouse unit slackened. He discovered later on
that this was due to the foreclosure.
Respondent instituted a case with the Office of Appeals, Adjudication and Legal Affairs
('OAALA') of the Housing and Land Use Regulatory Board ('HLURB') on 29 January 1991 to compel TSE
to complete the construction of the townhouse and to prevent the enforceability of the extra-
judicial foreclosure made by petitioner FEBTC and to have the mortgage between TSE and
petitioner FEBTC declared invalid, said mortgage having been entered into by the parties in
violation of section 18 of P.D. 957. The OAALA ruled in favor of the respondent. The CA affirmed
the decision of OAALA and found that petitioner had known that a "subdivision was forthcoming
inasmuch as the loan was obtained by TSE to partially finance the construction of a 20-unit
townhouse project, as stated in the 'Whereas' clause in the mortgage contract." Thus, the CA ruled
that "petitioner should not have merely relied on the representation of TSE that it had obtained the
approval and authorization of the proper government agencies but should have required the
submission of said documents."
Hence, this Petition.
ISSUE: Whether the mortgage contract violated Section 18 of P.D. 957, hence, void insofar as third
persons are concerned?
HELD: NO. Section 18 of PD 957 provides as follows:

"SEC. 18. Mortgages. — No mortgage on any unit or lot shall be made by the
owner or developer without prior written approval of the Authority. Such approval
shall not be granted unless it is shown that the proceeds of the mortgage loan shall
be used for the development of the condominium or subdivision project and
effective measures have been provided to ensure such utilization. The loan value of
each lot or unit covered by the mortgage shall be determined and the buyer
thereof, if any, shall be notified before the release of the loan. The buyer may, at
his option, pay his installment for the lot or unit directly to the mortgagee who
shall apply the payments to the corresponding mortgage indebtedness secured by
the particular lot or unit being paid for, with a view to enabling said buyer to
obtain title over the lot or unit promptly after full payment thereof."
It is undisputed that the subject 52.5-square-meter lot with a three-storey town house unit
is part of the property mortgaged to petitioner and is covered by TCT No. 156254. The lot was
technically described and segregated in a Contract to Sell that had been entered into before the
mortgage loan was contracted. The fact that the lot had no separate TCT did not make it less of a
"subdivision lot" entitled to the protection of PD 957.
That the subject of the mortgage loan was the entire land, not the individual subdivided
lots, does not take the loan beyond the coverage of Section 18 of PD 957. Undeniably, the lot was
also mortgaged when the entire parcel of land, of which it was a part, was encumbered.
The unmistakable intent of PD 957 is to protect innocent lot buyers from scheming
subdivision developers. As between these small lot buyers and the gigantic financial institutions
which the developers deal with, it is obvious that the law — as an instrument of social justice —
must favor the weak
Concededly, PD 957 aims to protect innocent lot buyers. Section 18 of the decree directly
addresses the problem of fraud committed against buyers when the lot they have contracted to
purchase, and which they have religiously paid for, is mortgaged without their knowledge. The
avowed purpose of PD 957 compels the reading of Section 18 as prohibitory — acts committed
contrary to it are void. Such construal ensures the attainment of the purpose of the law: to protect
lot buyers, so that they do not end up still homeless despite having fully paid for their home lots
with their hard-earned cash.

(Sales and Lease),
Law)
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Application of the Rules on Contracts to Onerous Donations
GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS) vs. THE PROVINCE OF TARLAC

[G.R. No. 157860. December 1, 2003]
YNARES-SANTIAGO
FACTS: The Sangguniang Panlalawigan of Tarlac passed a resolution which authorized and
approved the conversion of Urquico Memorial Athletic Field into a Government Center, as well as
the segregation and donation of portions of said land to different government agencies. The
Province of Tarlac and GSIS then executed a Memorandum of Agreement (MOA) whereby the
Province of Tarlac donated said lot to GSIS. The Province executed a Deed of Donation over the
subject lot in favor of the GSIS, which was duly accepted by the latter. As stipulated in the MOA,
GSIS donated P2,000,000.00 to the Province of Tarlac as financial assistance. Subsequently, Gov.
Jose Yap was elected as the new chief executive of Tarlac. Yap was of the opinion that the
provisions of the Deed of Donation were unfair to the Province. Later, the Provincial Administrator
wrote the GSIS, demanding the payment of P33,590,000.00 representing the balance of the value of
the lot donated, which the GSIS refused to pay. The Province of Tarlac then filed a Complaint
against GSIS for declaration of nullity of donation and memorandum of agreement, and recovery of
possession. Petitioner insists that the donation is perfectly valid, stating that there is nothing in the
Local Government Code which expressly states that the lack of an appraised valuation renders the
subject transfer void. Further, it contends that an appraised valuation is merely a formal and
procedural requisite, the lack of which cannot overturn substantive and vested rights.
ISSUE: Is the onerous donation a valid contract?
HELD: YES. Considering that the assailed donation is clearly onerous, the rules on contracts will
apply. ART. 1409 of the Civil Code provides “The following contracts are inexistent and void from
the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.”
A transfer of real property by a local government unit to an instrumentality of government
without first securing an appraised valuation from the local committee on awards does not appear
to be one of the void contracts enumerated in Article 1409 of the Civil Code. Neither does Section
381 of the Local Government Code expressly prohibit or declare void such transfers if an appraised
valuation from the local committee on awards is not first obtained. A duly executed contract
carries with it the presumption of validity. The absence of a prior appraised valuation by the local
committee on awards did not sufficiently overcome the presumption of validity of the contract,
considering that there is no express provision in the law which requires that the said valuation is a
condition sine qua non for the validity of a donation.
There being a perfected contract, the Province of Tarlac cannot revoke or renounce the
same without the consent of the other party. From the moment of perfection, the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage, and law.
The contract has the force of law between the parties and they are expected to abide in good faith
by their respective contractual commitments. Just as nobody can be forced to enter into a
contract, in the same manner, once a contract is entered into, no party can renounce it unilaterally
or without the consent of the other. It is a general principle of law that no one may be permitted

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to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto, to
the prejudice of the other party.
OBLIGATIONS AND CONTRACTS

CONTRACTS: Mere exchange of offers and counter-offers does not result in a perfected
contract
THE INSULAR LIFE ASSURANCE COMPANY, LTD. vs. ASSET BUILDERS CORPORATION
[G.R. No. 147410. February 5, 2004.]
PANGANIBAN
FACTS: Petitioner invited corporations engaged in building construction business to participate in
the bidding of petitioner’s proposed Insular Life building in Lucena City. Respondent, with four
other bidders submitted their respective bid proposals. Respondent's P12,962,845.54 bid was the
lowest among bidders. Petitioner proposed that respondent adjust its bid from P12,961,845.54 to
P13,000,000.00 to accommodate the wage increase. Subsequently, the respondent agreed to the
readjustment of the amount of its bid as proposed by the petitioner.
Petitioner informed Adrian Wilson International Associate[s], Inc. (AWIA), petitioner's
designated 'Project Manager' that petitioner had awarded the general construction contract of the
proposed Lucena Building to respondent. Thereafter, a Ground Breaking ceremony was held at the
project site. However, the respondent did not affix its conformity to any 'Notice of Award' much
less commence its construction of the project. Neither did it execute any 'Construction Agreement'.
Subsequently, respondent wrote petitioner informing the petitioner that the respondent would not
be able to undertake the project anymore because the prerequisite paper work and attendant
processing could not be fast-tracked and that, since the previous (2) weeks, prices had escalated,
which rendered its bid unattractive. Petitioner filed a complaint against respondent for damages.
ISSUE: Was there a perfected contract between petitioner and respondent?
HELD: NO. A contract is perfected by mere consent. From the moment of a meeting of the offer
and the acceptance upon the object and the cause that would constitute the contract, consent
arises. However, the offer must be certain and the acceptance seasonable and absolute; if
qualified, the acceptance would merely constitute a counteroffer. While there was an initial offer
made, there was no acceptance; because when there allegedly came an acceptance that could
have had a binding effect, the offer was already lacking. Clearly, no meeting of minds was
established. First, only after the bid bond had lapsed were post-qualification proceedings,
inspections, and credit investigations conducted. Second, the inter-office memoranda issued by
petitioner, as well as other memoranda between it and its own project manager, were simply
documents to which respondent was not privy. Third, petitioner proposed a counteroffer to adjust
respondent's bid to accommodate the wage increase.
The Civil Code provides that no contract shall arise unless its acceptance is communicated
to the offeror. That is, the mere determination to accept the proposal of a bidder does not
constitute a contract; that decision must be communicated to the bidder. Petitioner avers that an
acceptance was made, but this allegation has not been proven. Respondent had no knowledge of
such acceptance when it communicated its withdrawal to the former. Notably, this right to
withdraw was not exercised whimsically or arbitrarily by respondent. It did send a formal letter
expressing and explaining its withdrawal. As of that date, the decision to award the contract had
not been made according to the terms of the Instruction to Bidders. Besides, the subsequent acts
between the parties did not even serve as a confirmation of that decision. The existence of a
second proposal — petitioner's request for an adjustment of the bid to accommodate the wage
increase —belies the perfection of any contract arising from the first. Such failure to comply with a
condition imposed for the perfection of a contract resulted in failure of the contract.
(Sales and Lease),
Law)
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Where the parties merely exchange offers and counteroffers, no agreement or contract is
perfected. A party may withdraw its offer or counteroffer prior to its receipt of the other party's
acceptance thereof. To produce an agreement, the offer must be certain and the acceptance
timely and absolute.
CONTRACTS: Contracts Which Are Illegal Per Se; Article 1416

TORTS: Article 22 – Accion In Rem Verso
ALFRED FRITZ FRENZEL vs. EDERLINA P. CATITO

[G.R. No. 143958. July 11, 2003]
CALLEJO, SR.
FACTS:
Petitioner Alfred Fritz Frenzel is an Australian citizen of German descent. He worked as a
pilot with the New Guinea Airlines. He arrived in the Philippines in 1974, started engaging in
business in the country two years thereafter, and married Teresita Santos, a Filipino citizen. In
1981, Alfred and Teresita separated from bed and board without obtaining a divorce.
Sometime in February 1983, Alfred arrived in Sydney, Australia for a vacation. He went to
King's Cross, a night spot in Sydney, for a massage where he met Ederlina Catito, a Filipina.
Unknown to Alfred, she resided for a time in Germany and was married to Klaus Muller, a German
national. She left Germany and tried her luck in Sydney, Australia, where she found employment as
a masseuse in the King's Cross nightclub. Alfred was so enamored with Ederlina that he persuaded
her to stop working at King's Cross, return to the Philippines, and engage in a wholesome business
of her own. He also proposed that they meet in Manila, to which she assented. Within two weeks of
Ederlina's arrival in Manila, Alfred joined her. Alfred reiterated his proposal for Ederlina to stay in
the Philippines and engage in business, even offering to finance her business venture.
Alfred told Ederlina that he was married but that he was eager to divorce his wife in
Australia. Alfred proposed marriage to Ederlina, but she replied that they should wait a little bit
longer.
Alfred decided to stay in the Philippines for good and live with Ederlina. On different
occasions, Alfred bought several properties in the Philippines for Ederlina’s business and for the
couple’s residence using his own funds but since Alfred knew that as an alien he was disqualified
from owning lands in the Philippines, he agreed that only Ederlina's name would appear in the deed
of sale as the buyer of the property, as well as in the title covering the same. Alfred also sold his
properties in Australia and the proceeds of the sale were deposited in Alfred's account with the
Hong Kong Shanghai Banking Corporation (HSBC), Kowloon Branch. When Ederlina opened her own
account with HSBC Kowloon, Alfred transferred his with the said bank to this new account.
Alfred received a Letter from Klaus Muller. Klaus informed Alfred that he and Ederlina had
been married on October 16, 1978 and had a blissful married life until Alfred intruded therein.
Klaus stated that he knew of Alfred and Ederlina's amorous relationship and begged Alfred to leave
Ederlina alone and to return her to him. When Alfred confronted Ederlina, she admitted that she
and Klaus were, indeed, married. But she assured Alfred that she would divorce Klaus. Alfred was
appeased. He agreed to continue the amorous relationship and wait for the outcome of Ederlina's
petition for divorce.
Ederlina's petition for divorce was denied twice because Klaus opposed the same. Klaus
wanted half of all the properties owned by Ederlina in the Philippines before he would agree to a
divorce. Worse, Klaus threatened to file a bigamy case against Ederlina.
Alfred and Ederlina's relationship started deteriorating. Ederlina had not been able to
secure a divorce from Klaus. The latter could charge her for bigamy and could even involve Alfred,
who himself was still married. To avoid complications, Alfred decided to live separately from
Ederlina and cut off all contacts with her. Ederlina complained that he had ruined her life.
Shortly thereafter, Alfred filed a Complaint against Ederlina, with the RTC of Quezon City
for recovery of real and personal properties. In his complaint, Alfred alleged that Ederlina, without
his knowledge and consent, managed to transfer funds from their joint account in HSBC Hong Kong,
to her own account with the same bank. Using the said funds, Ederlina was able to purchase the
properties subject of the complaints. Ederlina failed to file her answer and was declared in default.
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In the meantime, Alfred also filed a complaint against Ederlina with the RTC of Davao City
for specific performance, declaration of ownership of real and personal properties, sum of money,
and damages. He alleged that during the period of their common-law relationship, he acquired
solely through his own efforts and resources real and personal properties in the Philippines valued
more or less at P724,000.00
The RTC of Quezon City ruled in favor of Alfred. However, after due proceedings in the RTC
of Davao City, the trial court ruled in favor of Erlinda. The trial court ruled that based on
documentary evidence, the purchaser of the three parcels of land subject of the complaint was
Ederlina. The court further stated that even if Alfred was the buyer of the properties; he had no
cause of action against Ederlina for the recovery of the same because as an alien, he was
disqualified from acquiring and owning lands in the Philippines. The sale of the three parcels of
land to the petitioner was null and void ab initio. Applying the pari delicto doctrine, the petitioner
was precluded from recovering the properties from the respondent.
The CA rendered a decision affirming in toto the decision of the RTC Hence, the petition at
bar.
ISSUES:
1. Can petitioner is entitled to recover the property under Article 1416 of the Civil Code?
2. Whether petitioner is entitled to recovery under Article 22 of the Civil Code?
HELD: 1. NO. Under Article 1416 of the Civil Code: When the agreement is not illegal per se but
is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff,
he may, if public policy is thereby enhanced, recover what he has paid or delivered.
The provision applies only to those contracts which are merely prohibited, in order to
benefit private interests. It does not apply to contracts void ab initio. The sale of three parcels of
land in favor of the petitioner who is a foreigner is illegal per se. The transactions are void ab initio
because they were entered into in violation of the Constitution. Thus, to allow the petitioner to
recover the properties or the money used in the purchase of the parcels of land would be
subversive of public policy.
2. NO. Article 22 of the Civil Code provides: Every person who through an act of
performance by another, or any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to him.
The provision is expressed in the maxim: "MEMO CUM ALTERIUS DETER DETREMENTO
PROTEST" (No person should unjustly enrich himself at the expense of another). An action for
recovery of what has been paid without just cause has been designated as an accion in rem verso.
This provision does not apply if, as in this case, the action is proscribed by the Constitution or by
the application of the pari delicto doctrine. It may be unfair and unjust to bar the petitioner from
filing an accion in rem verso over the subject properties, or from recovering the money he paid for
the said properties, but, as Lord Mansfield stated in the early case of Holman vs. Johnson: "The
objection that a contract is immoral or illegal as between the plaintiff and the defendant, sounds
at all times very ill in the mouth of the defendant. It is not for his sake, however, that the
objection is ever allowed; but it is founded in general principles of policy, which the defendant has
the advantage of, contrary to the real justice, as between him and the plaintiff."
Failure of the parties to describe the subject property does not render the contract void;
reformation is the remedy
PROCESO QUIROS vs MARCELO ARJONA

[GR No. 158901. MARCH 9, 2004.]
YNARES-SANTIAGO
FACTS: Petitioners are the heirs of the late Rosa Arjona Quiros who inherited from the latter a
parcel of land located at Labney, San Jacinto, Pangasinan. On December 19, 1996, petitioners
Processo Quiros and Leonarda Villegas filed a complaint with the office of the barangay captain of
(Sales and Lease),
Law)
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Labney, San Jacinto, Pangasinan, against respondent Arjona for recovery of ownership and
possession of the said parcel of land.
On January 5, 1997, an amicable settlement was reached between the parties. By reason
thereof, respondent executed a document denominated as “PAKNAAN” whereby he expressly stated
that he has in his possession a parcel of land which he will give to petitioners being the rightful
owners thereof. On the same date, another PAKNAAN was executed by Jose Banda, the person
cultivating the disputed land, whereby he recognized petitioner’s ownership of the same and
manifested his willingness to give it to the latter in the event that they would demand it from him.
Petitioners thereafter filed a complaint with the MCTC with prayer for the issuance of a
writ of execution of the compromise agreement. The court a quo however denied the same on the
ground that the subject property cannot be determined with certainty.
The RTC reversed the above decision and ordered the issuance of the writ of execution.
On appeal, the CA reinstated the decision of the court a quo. It held that the contract is
null and void for its failure to describe with certainty the object thereof.
ISSUE: Was the Court of Appeals correct in holding that the compromise agreement was null and
void for its failure to describe the subject property with certainty?
HELD: NO. The Paknaan executed by respondent Marcelo Arjona purports to convey a parcel of
land consisting of more or less 1 hectare to petitioners Quiros and Villegas. Another Paknaan,
prepared on the same date, and executed by one Jose Banda who signified his intention to vacate
the parcel of land he was tilling located at Torrod, Brgy. Labney, San Jacinto, Pangasinan, for and
in behalf of the Arjona family. On ocular inspection however, the municipal trial court found that
the land referred to in the second Paknaan was different from the land being occupied by
petitioners. Hence, no writ of execution could be issued for failure to determine with certainty
what parcel of land respondent intended to convey.
Since an amicable settlement, which partakes of the nature of a contract, is subject to the
same legal provisions providing for the validity, enforcement, rescission or annulment of ordinary
contracts, there is a need to ascertain whether the Paknaan in question has sufficiently complied
with the requisites of validity in accordance with Article 1318 of the Civil Code.
There is no question that there was meeting of the minds between the contracting parties.
In executing the Paknaan, the respondent undertook to convey 1 hectare of land to petitioners who
accepted. It appears that while the Paknaan was prepared and signed by respondent Arjona,
petitioners acceded to the terms thereof by not disputing its contents and are in fact now seeking
its enforcement. The object is a 1-hectare parcel of land representing petitioners’ inheritance from
their deceased grandmother. The cause of the contract is the delivery of petitioners’ share in the
inheritance. The inability of the municipal court to identify the exact location of the inherited
property did not negate the principal object of the contract. This is an error occasioned by the
failure of the parties to describe the subject property, which is correctible by reformation and does
not indicate the absence of the principal object as to render the contract void. It cannot be
disputed that the object is determinable as to its kind, i.e. 1 hectare of land as inheritance, and
can be determined without need of a new contract or agreement. Clearly, the Paknaan has all the
earmarks of a valid contract.
Although both parties agreed to transfer one-hectare real property, they failed to include
in the written document a sufficient description of the property to convey. This error is not one for
nullification of the instrument but only for reformation.
Article 1359 of the Civil Code provides:
When, there having been a meeting of the minds of the parties to a contract, their true
intention is not expressed in the instrument purporting to embody the agreement by reason of
mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of
the instrument to the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of
the parties, the proper remedy is not reformation of the instrument but annulment of the contract.
Reformation is a remedy in equity whereby a written instrument is made or construed so as
to express or conform to the real intention of the parties where some error or mistake has been
committed. In granting reformation, the remedy in equity is not making a new contract for the

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parties, but establishing and perpetuating the real contract between the parties which, under the
technical rules of law, could not be enforced but for such reformation.
In order that an action for reformation of instrument as provided in Article 1359 of the Civil
Code may prosper, the following requisites must concur: (1) there must have been a meeting of the
minds of the parties to the contract; (2) the instrument does not express the true intention of the
parties; and (3) the failure of the instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident.
When the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement, except when
it fails to express the true intent and agreement of the parties thereto, in which case, one of the
parties may bring an action for the reformation of the instrument to the end that such true
intention may be expressed.
Both parties acknowledge that petitioners are entitled to their inheritance, hence, the
remedy of nullification, which invalidates the Paknaan, would prejudice petitioners and deprive
them of their just share of the inheritance. Respondent can not, as an afterthought, be allowed to
renege on his legal obligation to transfer the property to its rightful heirs. A refusal to reform the
Paknaan under such circumstances would have the effect of penalizing one party for negligent
conduct, and at the same time permitting the other party to escape the consequences of his
negligence and profit thereby. No person shall be unjustly enriched at the expense of another.
Nature of a Compromise Agreement; Requisites of Solutio Indebiti
ROBERTO U. GENOVA vs. LEVITA DE CASTRO and COURT OF APPEALS

[G.R. No. 140989, July 22, 2003]
YNARES-SANTIAGO
FACTS: Petitioner was the registered owner of a parcel of land registered in his name under TCT
No. 172539. He obtained a loan from respondent Levita de Castro in order to finance his film
project. By way of security for the loan, petitioner turned over his owner’s duplicate certificate of
title. He also signed blank sheets of paper with the understanding that their deed of mortgage will
be printed thereon. Meanwhile, petitioner remained in possession of the property.
It appears that petitioner had previously obtained a loan which was secured by a real
estate mortgage over the subject property from UCPB. When he defaulted in payment, the bank
caused the extrajudicial foreclosure of the mortgage and purchased the property. Respondent
redeemed the property from UCPB and caused the cancellation of TCT No. 172539 on the strength
of a purported deed of sale from petitioner. It turned out that instead of printing a Deed of
Mortgage on the blank sheets of paper which petitioner had earlier signed, respondent caused to be
printed thereon an "Absolute Deed of Sale of a Registered Land" in her favor.
In G.R. No. 140989, petitioner filed an action for reformation of contract and reconveyance
against respondent. The parties entered into a compromise agreement wherein it was stipulated
that in case petitioner fails to repurchase the subject property, he shall be deemed to have
irrevocably waived any further right, claim or interest to the subject property and thereafter
respondent shall be entitled to a writ of execution to oust or eject petitioner from the house built
on said property as well as from its premises. Under the agreement, petitioner was obligated to
pay the total amount of P3,332,196.59. But he was only able to pay the sum of P2,287,000.00
within the stipulated period. Thereafter, he tendered payment for the remaining balance but
respondent refused to accept the same prompting him to consign with the trial court a check for
the amount of the remaining balance. Respondent filed a motion for the issuance of a writ of
execution on the ground that petitioner failed to pay the stipulated amount in full within the
period agreed upon.
ISSUES:
1. Is the compromise agreement binding upon the parties?
(Sales and Lease),
Law)
58
AW
2. Should the payments made by the petitioner be returned based on solutio indebiti?
HELD: 1. YES. A compromise agreement is an agreement between two or more persons who, for
preventing or putting an end to a lawsuit, adjust their respective positions by mutual consent in the
way they feel they can live with. A compromise is binding and has the force of law between the
parties, unless the consent of a party is vitiated—such as by mistake, fraud, violence, intimidation
or undue influence—or when there is forgery or if the terms of the settlement are so palpably
unconscionable. In this case, the judicial compromise specifically provided for the relief that the
parties may resort to in case of breach. In the event of breach or default by one party to a judicial
compromise in the performance of his obligations, the remedy of the aggrieved party is to move for
the execution of the compromise judgment. Even more than a contract which may be enforced by
ordinary action for specific performance, the compromise agreement is part and parcel of the
judgment, and may therefore be enforced as such by a writ of execution.
2. NO. There is solutio indebiti where: (1) payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who received the payment;
and (2) the payment is made through mistake, and not through liberality or some other cause. The
quasi-contract of solutio indebiti is based on the principle that no one shall enrich himself unjustly
at the expense of another. Article 2154 of the Civil Code provides: “If something is received when
there is no right to demand it, and it was unduly delivered through mistake, the obligation to
return it arises.” The first element of solutio indebiti is lacking. There can be no mistaken payment
because petitioner made payments to respondent pursuant to an agreement to repurchase the
property. Hence, the principle of solutio indebiti finds no application in this case. This
notwithstanding, petitioner is entitled to a refund of what he had paid based on equitable grounds.
It is iniquitous for respondent to forfeit both petitioner's land and hard-earned money.
Requisites for a Valid Novation
ROMEO C. GARCIA vs. DIONISIO V. LLAMAS

[G.R. No. 154127. December 8, 2003.]
PANGANIBAN
FACTS: Petitioner and Eduardo de Jesus borrowed P400,000 from respondent; they executed a
promissory note wherein they bound themselves jointly and severally to pay the loan. The loan has
long been overdue and despite demands, petitioner and de Jesus have failed and refused to pay it.
A complaint for sum of money and damages was filed by respondent against petitioner and de Jesus
Petitioner averred that he is relieved from any liability arising from the note inasmuch as the loan
had been paid by de Jesus by means of a check and that, in any event, the issuance of the check
and respondent's acceptance thereof novated or superseded the note. Respondent asserted that the
loan remained unpaid for the reason that the check issued by de Jesus bounced.
ISSUE: Were the issuance of the check and its acceptance acts constituting novation?
HELD: NO. Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third person
to the rights of the creditor. For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. In the instant case,
no novation took place. The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the check would take the
place of the note. There is no incompatibility between the promissory note and the check. The
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check had been issued precisely to answer for the obligation. On one hand, the note evidences the
loan obligation; and on the other, the check answers for it. Verily, the two can stand together.
A party seeking to enforce the contract must prove that the other party fully understood the
terms thereof
SPOUSES JAMES and FLORENCE TAN vs. CARMINA MANDAP, ET. AL.
[GR No. 150925. MAY 27, 2004.]
QUISUMBING
FACTS: Herein respondents are the legitimate children of Dionisio Mandap and Maria Contreras
Mandap. After the Mandap spouses parted ways, Maria Contraras Mandap who retained custody of
the children filed with the former Juvenile and Domestic Relations Court of Manila a civil case for
the dissolution and separation of their conjugal partnership. The said court adjudicated to Dionisio
Mandap two separate lots located at Sta. Cruz, Manila.
Dionisio thereafter lived with Diorita Dojoles until his death on May 25, 1989. He suffered
from diabetes since 1931, became totally blind in 1940, and was crippled for about 10 years until
his death. However, it appears that before his death, Dionisio conveyed the two lots to the sister
of Diorita, Elena Dojoles-Vasquez and her husband Crispulo Vasquez. As a consequence of which,
the old certificates of title in the name of Dionision were cancelled and a new one were issued in
lieu thereof in the name of the Vasquez’ spouses.
On September 5, 1989, herein private respondents filed an action against the Vasquez
spouses for cancellation of title with damages.
On September 11, 1989, the Vasquez spouses conveyed one of the lots to petitioners
spouses Tan. As a consequence of which, private respondents filed a supplemental complaint
against petitioners for the nullification of the sale to the latter of the disputed properties.
After trial on the merits, the court a quo rendered a decision in favor of private
respondents. On appeal, the CA affirmed in toto the decision of the lower court.
ISSUE: Was the Court of Appeals correct in declaring the sale of the subject property in favor of
petitioners as null and void?
HELD: YES. After careful consideration of the submission of the parties, we find in favor of
respondents. Petitioners’ contentions lack merit.
At the time Dionisio Mandap, Sr., purportedly sold the lots in question to the Vasquez
spouses, he was already totally blind and paralyzed. He could not possibly have read the contents
of the deeds of sale. He could not have consented to a contract whose terms he never knew nor
understood. It cannot be presumed Mandap, Sr., knew the contents of the deeds of sale disposing
of his properties. Article 1332 of the Civil Code is applicable in these circumstances, to wit:
ART. 1332. When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the former.
As the party seeking to enforce the contract, the petitioners should have presented
evidence showing that the terms of the deeds of sale to the Vasquez spouses were fully explained
to Mandap, Sr. But petitioners failed to comply with the strict requirements of Article 1332,
thereby casting doubt on the alleged consent of the vendor. Since the vendor in this case was
totally blind and crippled at the time of the sale, entirely dependent on outside support, every
care to protect his interest conformably with Article 24 of the Civil Code must be taken. Article 24
is clear on this.
ART. 24. In all contractual, property or other relations, when one of the parties is at
a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness,
tender age or other handicap, the courts must be vigilant for his protection.

(Sales and Lease),
Law)
60
AW
Petitioners presented no evidence disproving that (1) Mandap, Sr. was totally blind and
suffering from acute diabetes such that he could no longer discern the legal consequences of his
acts, and (2) that undue influence was exerted upon him, which vitiated his consent.
It is true that he who alleges a fact bears the burden of proving it. However, since fraud
and undue influence are alleged by respondents, the burden shifts to petitioners to prove that the
contents of the contract were fully explained to Mandap, Sr. Nothing, however, appears on record
to show that this requirement was complied with. Thus, the presumption of fraud and undue
influence was not rebutted.
Petitioners also claim the purchase price was not grossly inadequate so as to invalidate the
sale of subject properties. True, mere inadequacy of the price does not necessarily void a contract
of sale. However, said inadequacy may indicate that there was a defect in the vendor’s consent.
More important, it must be pointed out that the trial court and the Court of Appeals voided the sale
of the subject properties not because the price was grossly inadequate, but because the
presumptions of fraud and undue influence exerted upon the vendor had not been overcome by
petitioners, the parties interested in enforcing the contract.
Lastly, petitioners argue that since the sale of subject properties by Mandap, Sr. to the
Vasquez spouses is valid, it follows that the subsequent sale of the property by the latter to
petitioners is also valid. But this contention cannot be sustained, since we find that based on the
evidence on record, the sale in favor of the Vasquez spouses is void. Hence, it follows that the sale
to petitioners is also void, because petitioners merely stepped into the shoes of the Vasquez
spouses. Since the Vasquezes as sellers had no valid title over the parcel of land they sold,
petitioners as buyers thereof could not claim that the contract of sale is valid.
Rules in contracts involving Reciprocal Obligations

LEASE: requisites in order that a contractor may claim additional costs
RENATO SALVADOR vs. COURT OF APPEALS

[GR No. 124899. MARCH 30, 2004.]
CARPIO
FACTS: Private respondent Maria Romayne Miranda is the owner of a parcel of land located at
Cabcaben, Mariveles, Bataan. On April 15, 1990, Romayne appointed her cousin Gilbert Miranda as
her attorney-in-fact under a General Power of Attorney and authorized him to execute contracts on
her behalf and to manage her properties, including the one located at Cabacan, Mariveles, Bataan.
On July 9, 1990, Gilbert, as agent of Romayne, entered into a Development and
Construction Contract with petitioner Renato Salvador for the development of aforementioned
property into the Haven of Peace Memorial Park and the construction of several structures for that
purpose. Salvador agreed to undertake the project for the consideration of P3,986,643.50. The
contract also contained the following stipulations:
17. In case of changes, alterations or deviations in the plans, specifications and bill of materials
hereinabove mentioned as may be necessary in the course of the implementation of the
development and construction, the same shall be mutually agreed upon by the herein parties in
writing;
18. In case of substantial increase/s of prices of the materials, like cement, G.I. corrugated
sheets, the said contract price shall be adjusted accordingly as to the particular item/s of (sic)
material/s involved in the increase/s of prices;
xxx xxx xxx
20. All other matters relating to the project not stipulated in this contract are deemed not
included herein unless the parties may agree on said matters in writing;
The work on the project commenced as agreed and Gilbert promptly paid the progress
billing periodically submitted by Salvador.
However, on December 1990, Salvador demanded that Gilbert pay the following amounts in
addition to the Contract Price: (1) P39,000 or a 20% fee on P196,000 worth of filling materials
respondents themselves supplied for the Project; (2) a 20% escalation or adjustment of the unpaid
balance of the Contract Price in the amount of P637,862.96; and (3) billing for alleged additional
works in the amount of P399,190.46. Salvador was particularly insistent on the escalation of the
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Contract Price claiming that the prices of construction materials have increased by about 40%. He
further stressed that he would stop the operation in the event that Gilbert refuse to grant the
escalation.
Gilbert responded by requiring Salvador to prove his claim by corresponding receipts which
the latter failed to do. As a result of which, Gilbert refused to accede to the 20% escalation on the
contract price and 20% charge on the filling materials. This prompted Salvador to stop operation on
January 14, 1991. Moreover, it appears that Salvador received a notice of illegal construction from
DPWH and ordered him to immediately stop all building activities.
Salvador thereafter filed a complaint against private respondents for collection of sum of
money and damages.
After trial on the merits, the court a quo dismissed Salvador’s complaint on the ground that
there was no basis for an escalation of the contract price since he did not specify the increase in
prices of the materials he used as required by the contract. On appeal, the CA affirmed the lower
court’s decision and held Salvador in bad faith for stopping the construction of the project without
valid reasons.
ISSUES:
1. Was the CA correct in denying Salvador his claims for the additional works done on the
project and for the escalation of the contract price?
2. Was the CA correct in holding that Salvador acted in bad faith in stopping the
construction of the project?
HELD: 1. YES. We rule that the law and the Contract do not allow petitioner’s claims for
additional works and escalation of the Contract Price.
There are two requisites in order that a contractor may claim additional costs:
Art. 1724. The contractor who undertakes to build a structure or any other work for a
stipulated price, in conformity with plans and specifications agreed upon with the
landowner, can neither withdraw from the contract nor demand an increase in the price on
account of the higher cost of labor or materials, save when there has been a change in the
plans and specifications, provided:
(1) Such change has been authorized by the proprietor in writing; and
(2) The additional price to be paid to the contractor has been determined in writing by
both parties.
Compliance with both of these requirements is a condition precedent to the recovery of
additional costs. Even the absence of one of the elements required by Article 1724 bars recovery.
In the present case, Salvador failed to present any written authority from respondents for
any change in the plans or specifications agreed upon in the Contract. Salvador also failed to
present any agreement on the price for such additional work. Salvador did not notify respondents in
advance of the additional work he performed on the Project. The Contract did not authorize
Salvador to determine unilaterally the changes to be made in the Project, or what price to charge
for such changes. Not having fulfilled any of the requirements in Article 1724, Salvador’s claim of
P399,190.46 for alleged additional works has no legal basis.
On the other hand, Salvador’s demand for an escalation of the Contract Price hinges on
paragraph 18 of the Contract.
The parties may validly agree on an escalation clause. However, the enforceability of an
escalation clause is subject to the conditions stipulated in the contract.
Paragraph 18 of the Contract expressly provides for the escalation or adjustment of the
Contract Price in the event of “substantial increase/s of prices of the materials, like cement, G.I.
corrugated sheets.” Clearly, paragraph 18 of the Contract authorizes an escalation of the Contract
Price only if there are substantial increases in the prices of materials such as cement and G.I.
corrugated sheets. Absent substantial increases in the prices of materials used in the Project,
paragraph 18 would not apply.
The records show that respondents were amenable to an escalation of the Contract Price,
and that they in fact paid Salvador P250,000 in anticipation of the escalation. Respondents were
merely insisting that Salvador comply with what the Contract required, that is, specify the increase
(Sales and Lease),
Law)
62
AW
in the prices of particular materials purchased for the Project. Under paragraph 18, Salvador had
the obligation to show that there were substantial increases in the prices of particular materials
used in the Project. The trial and appellate courts found, and the records support the finding, that
Salvador did not comply with this obligation.
Paragraph 18 of the Contract did not give Salvador the right to determine arbitrarily the
proportion or amount of the escalation in the Contract Price. The Contract requires that any
escalation in the Contract Price must result from “substantial increase/s” in the prices of
“particular item/s or materials” used in the Project. This certainly excludes escalation based on
estimates or blanket increases. The computation Salvador provided failed to identify the particular
materials that had increased in price and the amount of such price increases. His general claim that
the prices of construction materials had increased by 40% was not sufficient under the terms of
paragraph 18. There was thus no basis for Salvador’s demand of a blanket 20% increase on all
materials.
Assuming arguendo that the Contract authorized Salvador to determine unilaterally the
escalation of the Contract Price, such a provision would be void for violating the principle of
mutuality.
We agree with the trial court that Salvador has no basis to charge respondents a fee of 20%
or P39,000 on filling materials that respondents supplied to the Project. Salvador himself testified
that: (1) respondents ordered and purchased the filling materials for P196,000; and (2) respondents
caused the delivery of the materials to the Project site. Neither the Contract nor any other
document presented during trial provided for a 20% charge on materials that respondents supplied
to the Project. On the contrary, under paragraph 20 of the Contract, “matters relating to the
Project not stipulated in this contract are deemed not included herein unless the parties may agree
on said matters in writing.” Under the Contract, Salvador had the obligation to supply the materials
for the construction of the Project. We cannot penalize respondents and reward Salvador for
respondents’ act in assuming part of Salvador’s obligation under the Contract when Salvador
himself did not object to such act.
2. NO. In a contract involving reciprocal obligations, the rules on when a party may be
declared in default are found in Article 1169:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time
he obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
xxx xxx xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.
Although Salvador stopped work on the Project in breach of the Contract and in violation of
the law, respondents were likewise remiss in their obligations under the Contract. Paragraph 7 of
the Contract states:
7. The project owner shall be responsible in applying for and obtaining at his/her own
expens/es (sic) whatever permits, licenses and/or documents as may be necessary from the
Government or any of its agencies, or otherwise; . . .
The National Building Code requires a building permit on all construction projects. In the
present case, the parties were able to start and even almost complete the Project without a
building permit. The failure of respondents to secure the required building permit constitutes a
breach of their obligation under the Contract. Even if Salvador did not voluntarily stop working on
the Project, he would not have been able to complete the Project because of the cease-and-desist
order from the DPWH.
Thus, we cannot attribute Salvador’s failure to complete the Project within the contract
period solely to his voluntary work stoppage. Paragraph 6 of the Contract provides:
6. That should there be any restraining order and/or injunction from the court or any
legal authority which will cause stoppage of the work of the CONTRACTOR relating to the said
project, the same should be considered as [a] fortuitous event and/or force majeure, and the time
of stoppage of work shall be deducted from the agreed time of completion of the project;
The DPWH Notice suspended the running of the period given to Salvador to complete the
Project. Respondents were not able to show that the DPWH lifted the cease-and-desist order, or
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that they subsequently secured a building permit. Since respondents failed to prove that they had
fulfilled their obligation under the Contract, Salvador’s failure to complete the Project within the
contract period cannot be attributed solely to his voluntary work stoppage. There is, therefore, no
legal basis to grant respondents’ counterclaim for P1,685,532.48, the amount they allegedly spent
to complete the Project.
CONTRACTS: Inexistent Contracts; Qualified acceptance constitutes a Counter-Offer

PROPERTY: owner and builder who are both in bad faith shall be treated as if both were in
Good Faith; Builder to pay reasonAble rents
NATIONAL HOUSING AUTHORITY vs GRACE BAPTIST CHURCH

[GR No. 156437. MARCH 1, 2004.]
YNARES-SANTIAGO
FACTS: On June 13, 1986, private respondent Grace Baptist Church manifested to herein
petitioner through a letter its desire in acquiring Lots 4 and 17 of the General Mariano Alvarez
Resettlement Project in Cavity. The said request was granted by petitioner and respondent
immediately took possession of the properties and introduced improvements thereon.
On February 22, petitioner’s Board of Directors passed Resolution No. 2126 approving the
sale of the subject lots to respondent at the price of PHP700.00 per square meter or a total price of
PHP 430,500.00. The said resolution was communicated to respondent.
On April 8, 1991, respondent tendered to petitioner a manager’s check in the amount of
PHP55,350.00, purportedly in full payment of the subject lots based on the quoted price of
petitioner’s Field Office. The check was, however, returned by petitioner for being insufficient to
cover the purchase price of the subject lots which, according to petitioner, have already changed.
Respondent consequently instituted an action for specific performance and damages
against petitioner. After trial on the merits, the court a quo held that there was no perfected
contract of sale and ordered respondent to return possession of the property and to pay rental for
the use of the same. On appeal, although the CA affirmed the lower court’s ruling that there was
no perfected contract of sale, it nevertheless ordered petitioner to sell the lots to respondents at
the price of PHP700.00 per square meter on the ground that NHA’s resolution, not having been
revoked, continues to be in effect.
ISSUE: Can NHA be compelled to sell the subject lots to respondents?
HELD: NO. Petitioner NHA is not estopped from selling the subject lots at a price equal to their
fair market value, even if it failed to expressly revoke Resolution No. 2126. It is, after all, hornbook
law that the principle of estoppel does not operate against the Government for the act of its
agents, or, as in this case, their inaction.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and
obligations arising therefrom have the force of law between the parties and should be complied
with in good faith. However, it must be understood that contracts are not the only source of law
that govern the rights and obligations between the parties. More specifically, no contractual
stipulation may contradict law, morals, good customs, public order or public policy. Verily, the
mere inexistence of a contract, which would ordinarily serve as the law between the parties, does
not automatically authorize disposing of a controversy based on equitable principles alone.
Notwithstanding the absence of a perfected contract between the parties, their relationship may
be governed by other existing laws which provide for their reciprocal rights and obligations.
It must be remembered that contracts in which the Government is a party are subject to
the same rules of contract law which govern the validity and sufficiency of contract between
individuals. All the essential elements and characteristics of a contract in general must be present
in order to create a binding and enforceable Government contract.
It appearing that there is no dispute that this case involves an unperfected contract, the
Civil Law principles governing contracts should apply.
(Sales and Lease),
Law)
64
AW
In the case at bar, the offer of the NHA to sell the subject property, as embodied in
Resolution No. 2126, was similarly not accepted by the respondent. Thus, the alleged contract
involved in this case should be more accurately denominated as inexistent. There being no
concurrence of the offer and acceptance, it did not pass the stage of generation to the point of
perfection. As such, it is without force and effect from the very beginning or from its incipiency,
as if it had never been entered into, and hence, cannot be validated either by lapse of time or
ratification. Equity can not give validity to a void contract, and this rule should apply with equal
force to inexistent contracts.
We note from the records, however, that the Church, despite knowledge that its intended
contract of sale with the NHA had not been perfected, proceeded to introduce improvements on
the disputed land. On the other hand, the NHA knowingly granted the Church temporary use of the
subject properties and did not prevent the Church from making improvements thereon. Thus, the
Church and the NHA, who both acted in bad faith, shall be treated as if they were both in good
faith. In this connection, Article 448 of the Civil Code provides:
The owner of the land on which anything has been built, sown or planted in good faith,
shall have the right to appropriate as his own the works, sowing or planting, after payment of the
indemnity provided for in articles 546 and 548, or to oblige the one who built or planted to pay the
price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot
be obliged to buy the land and if its value is considerably more than that of the building or trees. In
such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the
building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof.
Compromise Agreement; Fortuitous Event; Elements; Christmas Season Is not a Fortuitous

Event
MANILA INTERNATIONAL AIRPORT AUTHORITY (MIAA) vs ALA INDUSTRIES CORP.

[GR. No. 147349. FEBRUARY 13, 2004.]
PANGANIBAN
FACTS: In a public bidding conducted by herein petitioner MIAA for a contract involving the
structural repair and waterproofing of the International Passenger Terminal and International
Container Terminal, herein respondent was awarded with the contract.
Respondent undertook the repair and waterproofing of the abovementioned buildings
pursuant to the contract which gave rise to an obligation on the part of petitioner amounting to
PHP12,018,129.84.
Alleging that respondent failed to complete the project within the agreed completion date,
petitioner unilaterally rescinded the contract. Respondent objected to the rescission and
reiterated its claims.
Both parties thereafter executed and jointly filed in court a motion for judgment based on
compromise agreement wherein respondent accepted petitioner’s offer of PHP5,946,294.31 as full
and complete payment of its claims. The said agreement further provided that petitioner shall pay
the aforesaid amount within 30 days from receipt of the copy of the Order of the Court approving
the said Compromise Agreement.
For failure of petitioner MIAA to pay within the period above stipulated, respondent filed a
motion for execution to enforce its claim. Petitioner filed a comment and attributed the delay in
complying with its obligation on the Christmas Season, which it claimed to be a fortuitous event.
After trial on the merits, the court a quo rendered a decision in favor of petitioner. On
appeal, the CA reversed the above decision and ordered the lower court to issue a writ of execution
to enforce respondent’s claim ratiocinating that a judgment rendered in accordance with a
compromise agreement was immediately executory.
ISSUE: Was the court of Appeals correct in holding that the Christmas Season was not a fortuitous
event that excused petitioner from complying with the terms and conditions of the judicially
approved Compromise Agreement?

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HELD: YES. A compromise agreement is a contract whereby the parties make reciprocal
concessions to resolve their differences, thus avoiding litigation or putting an end to one that has
already commenced. Generally favored in law, such agreement is a bilateral act or transaction
that is binding on the contracting parties and is expressly acknowledged by the Civil Code as a
juridical agreement between them. Provided it is not contrary to law, morals, good customs,
public order or public policy, it is immediately executory.
In a long line of cases, we have consistently held that: ". . . 'a compromise once approved
by final orders of the court has the force of res judicata between the parties and should not be
disturbed except for vices of consent or forgery.' Hence, 'a decision on a compromise agreement is
final and executory . . .."' Such agreement has the force of law and is conclusive between the
parties. It transcends its identity as a mere contract binding only upon the parties thereto, as it
becomes a judgment that is subject to execution in accordance with the Rules. Judges therefore
have the ministerial and mandatory duty to implement and enforce it.
To be valid, a compromise agreement is merely required by law, first, to be based on real
claims; second, to be actually agreed upon in good faith. Both conditions are present in this cases
The claims of the parties are valid, and the agreement done without any fraud or vice of consent.
Without a doubt, each of the parties herein entered into Compromise Agreement freely and
voluntarily. When they carefully negotiated the terms and provisions thereof, they were adequately
assisted by their respective counsels — petitioner, no less than by the Office of the Government
Corporate Counsel (OGCC). Each party agreed to something that neither might have actually
wanted, except for the peace that would be brought by the avoidance of a protracted litigation.
Hence, the Agreement must govern their relations.
The failure to pay on the date stipulated was clearly a violation of the Agreement. Within
thirty days from receipt of the judicial Order approving it — on December 20, 1997 — payment
should have been made, but was not. Thus, non-fulfillment of the terms of the compromise
justified execution. It is the height of absurdity for petitioner, to attribute to a fortuitous event its
delayed payment. Petitioner's explanation is clearly "a gratuitous assertion that borders on
callousness." The Christmas season cannot be cited as an act of God that would excuse a delay in
the processing of claims by a government entity that is subject to routine accounting and auditing
rules.
A fortuitous event is one that cannot be foreseen or, though foreseen, is inevitable. It has
the following characteristics:
". . . (a) [The cause of the unforeseen and unexpected occurrence, or the failure of the debtor to
comply with his obligations, must be independent of human will; (b) it must be impossible to
foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be
impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner; and (d) the obligor must be free from any participation in
the aggravation of the injury resulting to the creditor."
None of these elements appears in this case.
Tire act-of-God doctrine requires all human agencies to be excluded from creating the
cause of the mischief. Such doctrine cannot be invoked to protect a person who has failed to take
steps to forestall the possible adverse consequences of loss or injury. Since the delay in payment in
the present case was partly a result of human participation — whether from active intervention or
neglect — the whole occurrence was humanized and was therefore outside the ambit of a caso
fortuito.
Verily, an assiduous scrutiny of the records convinces us that it was negligent, and that it
thereby incurred a delay the. performance of its contractual obligation under the judicial
compromise. It thus created an undue risk of injury to respondent by failing to exercise that
reasonable degree of care, precaution or vigilance that the circumstances justly demanded, and
that an ordinarily prudent person would have done.
"The principle of autonomy of contracts must be respected." The Compromise Agreement
was a contract perfected by mere consent; hence, it should have been respected. Item 3 thereof
provided that failure of petitioner to pay within the stipulated period would entitle respondent to a
writ of execution to enforce all the claims that had been pleaded by the latter in the Complaint.
This provision must be upheld, because the Agreement supplanted the Complaint itself. Although
(Sales and Lease),
Law)
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judicial approval was not required for the perfection of that Agreement once it was granted, it
could not and must not be disturbed except for vices of consent or forgery.
No such infirmity can be found in the subject Compromise Agreement. Its terms are clear
and leave no doubt as to their intention. Thus, the literal meaning of its stipulations must control.
It "must be strictly interpreted and . . . understood as including only matters specifically
determined therein or which, by necessary inference from its wording, must be deemed included.
The lower court was without power to relieve petitioner from an obligation it had
voluntarily assumed, simply because the Agreement later turned out to be unwise, disastrous or
foolish. It had no authority to impose upon the parties a judgment different from or against the
terms and conditions of their Compromise Agreement. It could not alter a contract by construction
or make a new one for the parties; "its duty is confined to the interpretation of the one which they
have made for themselves without regard to its wisdom or folly as the court cannot supply material
stipulations or read into the contract words which it does not contain." It could not even set aside
its judgment without declaring in an incidental hearing that the Agreement was vitiated by any of
the grounds enumerated in Article 2038 of the Civil Code. Above all, neither the Agreement nor
the court's approval of it was ever questioned or assailed by the parties.
Basic is the rule that if a party fails or refuses to abide by a compromise agreement, the
other may either enforce it or regard it as rescinded and insist upon the original demand. For
failure of petitioner to abide by the judicial compromise, respondent chose to enforce it. The
latter's course of action was in accordance with the very stipulations in the Agreement that the
lower court could not change.
Respondent is thus entitled to a writ of execution for the total amount contained in the
Compromise Agreement. The Court cannot reduce it. The partial payment made by petitioner does
not at all contravene Article 1229 of the Civil Code, which is applicable only to contracts that are
the subjects of litigation, not to final and executory judgments.
Interpretation; When the terms of an agreement are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning thereof shall prevail.
MILWAUKEE INDUSTRIES CORPORATION vs. PAMPANGA III ELECTRIC COOPERATIVE

[G.R. No. 152569. May 31, 2004.]
TINGA
FACTS: Respondent is the grantee of a franchise to provide electric light and power supply in the
municipalities of Apalit, Macabebe, Masantol, Minalin, San Simon and Sto. Tomas, Pampanga.
Petitioner, a private corporation operating a steel plant in Apalit, Pampanga, wanted to purchase
electricity for its operations directly from the National Power Corporation (NAPOCOR). However,
to be able to do so, petitioner needed to secure a waiver from respondent, as the municipality of
Apalit was within its franchise area.
On February 17, 1995, petitioner and respondent executed a Waiver Agreement for Sale of
Electricity (Waiver Agreement). Under the contract, petitioner bound itself to pay respondent a
waiver or royalty fee equivalent to two and a half percent (2.5%) of its monthly power bill from
NAPOCOR not later than the 15th day of each month, plus a surcharge of 2% per month in case of
delay.
On March 24, 1998, respondent filed a Complaint for collection of sum of money in the
proper RTC alleging that pursuant to the Waiver Agreement, it billed petitioner for unpaid royalties
and surcharges for the period covering April 1997 to January 1998. Despite repeated demands for
payment, petitioner refused to pay respondent. In its answer, petitioner denied that it was liable
to pay respondent royalty fees and surcharges. It claimed that respondent induced it to execute the
Waiver Agreement through fraud and misrepresentation. Respondent allegedly misrepresented that
it had an existing agreement with another corporation, and its agreement therewith contained the
same terms and conditions as the Waiver Agreement between petitioner and respondent. However,
petitioner discovered that the other corporation only paid a one-time fee for a similar
waiver/royalty, while petitioner was required to pay royalties every month.
The RTC rendered its Decision in favor of petitioner holding that although the wording of
the contract makes it appearthat petitioner is obliged to pay royalty fees to respondent every
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month, there is proof that such was not the real intention of the parties. On appeal, the above
decision was reversed by the appellate court which applied the general rule in the construction of
contracts after finding that its terms were clear and leave no room for improvement.
ISSUE: Is petitioner liable to pay royalty fees to respondent pursuant to the Waiver Agreement?
HELD: YES. In resolving an issue based upon contract, the Court must first examine the contract
itself, especially the provisions thereof which are relevant to the controversy. The general rule is
that when the terms of an agreement are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations shall prevail. It is further required that
the stipulations of a contract be interpreted as a whole, attributing to the questionable stipulations
the sense which may result from all of them taken jointly.
Bearing in mind the aforementioned guidelines, and after a thorough study of the contract
in question, the Court finds that the Court of Appeals committed no reversible error in ruling that
petitioner is indeed liable to pay respondent royalty fees and surcharges pursuant to Item 1 of the
Waiver Agreement.
Petitioner's obligation under Item 1 and the extent of such obligation are not difficult to
divine. The said provision in no uncertain terms obligates petitioner to pay royalty fees in the
amount of 2.5% of its electric power consumption appearing in its bill from NAPOCOR not later than
the 15th of every month. Its failure to pay the royalty fee on the 15th shall result in its payment of
a 2% surcharge.
Item 1, as worded, provides no qualification to petitioner's obligation. However, petitioner
claims that royalty fees would only be due to respondent if petitioner's electric power consumption
for the month exceeds 32 megawatts. Petitioner anchors its claim on the second Whereas clause of
the Waiver Agreement which states:
WHEREAS, the CONSUMER has a steel plant located along McArthur Highway, Paligui, Apalit,
Pampanga with a projected load of Thirty-Two (32) megawatts;
There is nothing in aforementioned clause which supports petitioner's claim that the clause
limits its obligation under Item 1. Evidently, the clause is merely descriptive of petitioner's electric
power supply requirements. This interpretation is also supported by a reading of the contract in its
entirety.
There being no ambiguity in the wording of Item 1 of the Waiver Agreement, its literal
meaning is controlling. To give effect to Item 1 as worded is likewise consistent with the rule that
when the terms of an agreement have been reduced to writing, it is considered as containing all
the terms agreed upon by the parties and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement.
An action for the Declaration of Nullity of the Deed of Sale on the ground of absence of consent
is imprescriptible
AZNAR BROTHERS REALTY COMPANY vs. HEIRS OF ANICETO AUGUSTO & PETRONA CALIPAN
[G.R. No. 140417. May 28, 2004.]
CORONA
FACTS: The subject matter of this controversy is Lot No. 4397. It was owned by Aniceto Augusto,
who was married to Petrona Calipan. When Aniceto died, he left behind five children. The
property remained undivided as evidenced by Tax Declaration No. 026794 issued to Petrona Calipan
in 1945. In 1962, it was cancelled pursuant to an "Extrajudicial Partition". In lieu thereof, tax
declaration certificates covering Lot No. 4397 were issued to the following: Filomeno Augusto,
Ciriaco Icoy, Felipe Aying, Zacarias Augusto, Abdon Augusto, Teoderica Augusto, Pedro Tampus and
(Sales and Lease),
Law)
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Anacleto Augusto. These persons sold the property to petitioner Aznar Brothers Realty Company
(Aznar Realty) through a Deed of Sale of Unregistered Land, which was registered on the same
date.
Carlos Augusto, claiming to be an heir of "his father Aniceto" (when in fact he was the son
of Zacarias and as such was in reality a grandson of Aniceto), filed a Petition for the Reconstitution
of Title. He alleged that the original copy and duplicate owner's copy of the title of the property
sold to respondent Aznar were lost during the war.
On July 28, 1992, respondent Heirs filed a civil case against petitioner Aznar Realty, and
Carlos and Filomeno Augusto for (1) recovery of Lot No. 4397; (2) the declaration of the Deed of
Sale dated February 13, 1962 as null and void; (3) the recognition of the Heirs; (4) the cancellation
of the TCT issued to petitioner Aznar Realty and (5) the issuance of a restraining order and/or writ
of preliminary injunction. Only petitioner Aznar Realty filed an answer interposing the defense of
lack of cause of action, prescription and laches.
The trial court ruled that the claim of respondent Heirs was already barred by prescription.
On appeal, the CA reversed the above decision and held that private respondent’s cause of action
had not yet prescribed since it was for the declaration of nullity of the Deed of Sale on the ground
of absence of consent; such action being imprescriptible. The CA further held that respondents
were not also barred by laches.
ISSUE: Is the action of the respondents for the declaration of nullity of the Deed of Sale
imprescriptible?
HELD: YES. The "owners" who sold the land to petitioner Aznar Realty could not have been the
true owners of the land since there was no showing how they acquired the land in the first place.
Thus, the trial court should not have dismissed the complaint without looking into the validity of
the sale of land to petitioner Aznar Realty.
The respondents' claim is imprescriptible and not barred by laches. Respondents anchored
their action for reconveyance in the trial court on the nullity of the Deed of Sale between
petitioner Aznar and the supposed owners of the property. Respondents sought the declaration of
nullity (inexistence) of the Deed of Sale because of the absence of their consent as the true and
lawful owners of the land.
Neither is respondents' claim barred by laches. In the same case of Injug-Tiro, we ruled
that:
In actions for reconveyance of property predicated on the fact that the conveyance complained of
was null and void ab initio, a claim of prescription of action would be unavailing. The action or
defense for the declaration of the inexistence of a contract does not prescribe. Neither could
laches be invoked in the case at bar. Laches is a doctrine in equity and our courts are basically
courts of law and not courts of equity. Equity, which has been aptly described as "justice outside
legality," should be applied only in the absence of, and never against, statutory law. Aequetas
nunguam contravenit legis. The positive mandate of Art. 1410 of the New Civil Code conferring
imprescriptibility to actions for declaration of the inexistence of a contract should pre-empt and
prevail over all abstract arguments based only on equity. Certainly, laches cannot be set up to
resist the enforcement of an imprescriptible legal right, and petitioners can validly vindicate their
inheritance despite the lapse of time.
Consequently, respondent Heirs could not have been guilty of laches. It was only in 1991
when they were evicted that they discovered their land had been sold to Aznar Realty. From the
testimony of respondent Heirs, it was apparent that all matters relating to the land had been
entrusted to Carlos Augusto by the Heirs, most of whom were unschooled farmers who did not know
how to read and write. They never expected him to dupe them of their inheritance. They had no
reason to suspect that he had sold the land since they remained in possession thereof until they
were ejected in 1991 by petitioner Aznar Realty.
Respondents were evicted from their land in November 1991 and they filed their complaint
with the trial court on July 28, 1992. Only eight months had passed from the time they were
ejected to the time they asserted their rights over their property. They certainly could not be
deemed to have slept on their rights.

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Rescission in Contract of Lease
LEONARDO CHUA vs. MUTYA B. VICTORIO

[G.R. No. 157568. May 18, 2004.]
YNARES-SANTIAGO
FACTS: Ejectment cases were filed by respondent Mutya Victorio, the owner of certain commercial
units located on Panganiban Street, Santiago City, Isabela, against petitioners herein. Leonardo
Chua is currently the occupant of one unit, while petitioners Heirs of Yong Tian are the occupants
of two units. It appears that these were not the first ejectment cases filed by respondent against
petitioners. An earlier ejectment case ended in a compromise between the parties, approved by
the trial court, whereby they agreed as follows: “1.That the present rental on the leased premises
shall be increased by 100 (100%) Percent effective August 1990; 2. That rental increases shall be
reviewed every after four (4) years based on the then prevailing rental rates at commercial
establishments along Panganiban Street, Santiago, Isabela, but in no case shall be increased by
more than twenty-five (25%) percent; 3. That defendants shall pay to plaintiffs their respective
accrued rental differentials within a period of one (1) year to be covered by postdated checks in
equal amounts beginning November 30, 1991, and every end of the month thereafter”;
Sometime in September of 1994, respondent, made a rental survey of other commercial
establishments along Panganiban Street. On the basis of this survey, a 25% rental increase was
demanded from petitioners. Petitioners refused to pay the increased rentals which compelled
respondent to file unlawful detainer cases against both lessees in which petitioners were ordered to
vacate the leased premises. The decision became final and executory, and, upon motion filed by
respondent, the MTCC issued writs of execution ordering the ejectment of petitioners from
respondent's property. Petitioners filed motions to quash the writs of execution, contending that
there were supervening events which rendered the execution unjust or impossible. Specifically,
petitioners claimed that they had acceded to the request for an increase in rentals, and had paid
respondent the amount demanded. The MTCC found that petitioners had indeed paid to respondent
the increased monthly rental even before the Court of Appeals decision attained finality. In fact,
petitioners offered to pay the increased rentals as early as January 1996, while the cases were still
pending with the RTC. The increased monthly rentals were accepted by respondent without
reservation, and monthly payment of the rentals at the increased rate continued throughout the
pendency of the suits. Accordingly, the MTCC quashed the writs of execution that it earlier issued.
Subsequently, on October 10, 1998, respondent wrote a letter to petitioners informing
them of her intention to increase the monthly rentals effective November 1, 1998, from P6,551.25
per unit to a sum more than double that, namely, P15,000.00 per unit. Petitioners refused to pay
this amount, contending that it was beyond the allowable rental increase embodied in the
compromise agreement. Respondent thus instituted Civil Cases seeking the ejectment of
petitioners. In a joint decision dated May 10, 1999, the MTCC dismissed these complaints for lack of
merit. On appeal, the RTC initially reversed the MTCC, but later reversed its earlier decision. On
March 9, 2000, the RTC issued an order affirming the MTCC's dismissal of the complaints.
Respondent filed a petition for review with the Court of Appeals. The Court of Appeals ruled that
the compromise agreement, which set a definite period of four years for the lease contract, had
been abrogated by petitioners' refusal to pay the increased rentals in 1994. Accordingly, in 1994,
the juridical relation between the parties was severed. When respondent accepted payment of the
increased monthly amount, an entirely new contract of lease was entered into between the
parties. Since payment of rent was made on a monthly basis, and pursuant to Article 1687 of the
Civil Code, the period of this lease contract was monthly. Upon the expiration of every month, the
lessor could increase the rents and demand that the lessee vacate the premises upon non-
compliance with increased terms. In exercise of equity, however, the Court of Appeals granted
petitioners an extension of one year from finality of the decision within which to vacate the
premises. Petitioners' motion for reconsideration was denied on March 11, 2003. Hence, this
petition.
ISSUE: Does respondent have the right to demand that petitioners should vacate the premises?
(Sales and Lease),
Law)
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HELD: YES. The right of rescission is statutorily recognized in reciprocal obligations, such as
contracts of lease. In addition to the general remedy of rescission granted under Article 1191 of the
Civil Code, there is an independent provision granting the remedy of rescission for breach of any of
the lessor or lessee's statutory obligations. Under Article 1659 of the Civil Code, the aggrieved party
may, at his option, ask for (1) the rescission of the contract; (2) rescission and indemnification for
damages; or (3) only indemnification for damages, allowing the contract to remain in force.
Payment of the rent is one of a lessee's statutory obligations, and, upon non-payment by
petitioners of the increased rental in September 1994, the lessor acquired the right to avail of any
of the three remedies outlined above.
Ordinarily, an obligee's remedies upon breach of an obligation are judicial in nature. This is
implicit in the third paragraph of Article 1191, and in Article 1659 of the Civil Code. Thus, the mere
failure by the lessees to comply with the increased rental did not ipso jure produce the rescission
of the contract of lease.
However, although the lessor did not resort to judicial action to specifically avail of any of
the three remedies in Article 1659, this does not mean that the compromise agreement continues
in force. In certain exceptional cases, the law recognizes the availability of extrajudicial remedies,
which exist in addition to the judicial remedies given above.
When, in 1994, the petitioners refused to pay the rentals, and respondent initiated the
earlier ejectment suits, the juridical bond between the parties was severed. The parties were no
longer connected by the link of a lessor-lessee relation. The compromise agreement ceased to be
the law between the parties and ceased to govern their legal relationship. No amount of
subsequent payment by the lessees could automatically restore the parties to what they once were.
The lessor's acceptance of the increased rentals did not have the effect of reviving the
earlier contract of lease. Upon the moment of acquiescence by respondents to the increased
amount, an entirely new contract of lease was entered into, forging an entirely new juridical
relation.
The new contract of lease did not have a fixed period. As such, Article 1687 of the Civil
Code is applicable:
Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to
year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to week,
if the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a
monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for
the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the
courts may likewise determine a longer period after the lessee has been in possession for over six
months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in
the place for over one month.
Since the payment of the rentals was made on a monthly basis, respondent's contention,
that the contract of lease was on a monthly term, is correct.
Hence, respondent was well within her rights to increase the rental of her properties each
month as she desired, subject to existing laws. Petitioners were similarly within their rights to
refuse to acquiesce. Upon this refusal, the contract of lease between the parties was once more
terminated. Respondent thus has the right to demand that petitioners vacate her properties.
We correctly pointed out that the compromise agreement did not deal with the duration of
the original lease contract; but we did not categorically state that the compromise agreement
continues to be valid between the parties thereto.
The earlier contract of lease was terminated not because the term expired. As stated, the
compromise agreement did not fix any specific period for the lease. Rather, the earlier contract of
lease was terminated because respondent chose to exercise a right granted by law to an aggrieved
lessor, which statutory right is deemed written into the contract of lease.
CONTRACTS: RESCISSION OF CONTRACTS WILL NOT BE PERMITTED FOR A SLIGHT OR A CASUAL

BREACH THEREOF

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SPS. MANUEL and JOCELYN BARREDO vs. SPS. EUSTAQUIO and EMILDA LEAÑO
[G.R. No. 156627 June 4, 2004.]
PUNO
FACTS: Petitioners spouses Manuel and Jocelyn Barredo (Barredo Spouses) bought a house and lot
located at Pilar Village, Las Piñas, Metro Manila,, with the proceeds of a P50,000.00 loan from the
Social Security System (SSS) which was payable in 25 years and an P88,400.00 loan from the Apex
Mortgage and Loans Corporation (Apex) which was payable in 20 years. To secure the twin loans,
they executed a first mortgage over the house and lot in favor of SSS and a second one in favor of
Apex.
The Barredo Spouses thereafter sold their house and lot to respondents Eustaquio and Emilda
Leaño (Leaño Spouses) by way of a Conditional Deed of Sale with Assumption of Mortgage. It was
agreed that the Leaño Spouses would pay the Barredo Spouses P200,000.00, P100,000.00 of which
would be payable on July 15, 1987, while the balance of P100,000.00 would be paid in ten (10)
equal monthly installments after the signing of the contract. In addition to the above stipulation, it
was further agreed that the Leaño Spouses would also assume the first and second mortgages and
pay the monthly amortizations to SSS and Apex beginning July 1987 until both obligations are fully
paid.
The purchase price of P200,000 was paid to the Barredo Spouses who turned over the
possession of the house and lot in favor of the Leaño Spouses. Two (2) years later, the Barredo
Spouses initiated a complaint before the Regional Trial Court seeking the rescission of the contract
on the ground that the Leaño Spouses despite repeated demands failed to pay the mortgage
amortizations to the SSS and Apex causing the Barredo Spouses great and irreparable damage. In
their answer, the respondent spouses maintained that they were up-to-date with their amortization
payments to Apex but were not able to pay the SSS amortizations because their payments were
refused upon the instructions of the Barredo Spouses.
The trial court thus rendered judgment in favor of the plaintiff, the Barredo Spouses. The
Leaño Spouses appealed to the Court of Appeals, which reversed and set aside the decision of the
trial court on the ground that the payments of amortization to Apex and SSS were mere collateral
matters, which do not detract from the condition of paying the principal consideration.
ISSUE: Are payments of amortizations to APEX and SSS mere collateral matters and does not
constitute a substantial breach of the contract as to warrant its rescission?
HELD: YES. A careful reading of the pertinent provisions of the agreement readily shows that the
principal object of the contract was the sale of the Barredo house and lot, for which the Leaño
Spouses gave a down payment of P100,000 as provided for in par. 1 of the contract, and thereafter
ten (10) equal monthly installments amounting to another P100,000.00, as stipulated in par. 2 of
the same agreement. The assumption of the mortgages by the Leaño Spouses over the mortgaged
property and their payment of amortizations are just collateral matters which are natural
consequences of the sale of the said mortgaged property.
Thus, par. 3 of the agreement provides that the Leaño Spouses "bind themselves to assume
as they hereby assume beginning on July 1, 1987, the payment of the unpaid balance . . ." Hence,
the Leaño Spouses merely bound themselves to assume, which they actually did upon the signing of
the agreement, the obligations of the Barredo Spouses with the SSS and Apex. Nowhere in the
agreement was it stipulated that the sale was conditioned upon their full payment of the loans with
SSS and Apex. When the language of the contract is clear, it requires no interpretation, and its
terms should not be disturbed. The primary and elementary rule of construction of documents is
that when the words or language thereof is clear and plain or readily understandable by any
ordinary reader thereof, there is absolutely no room for interpretation or construction anymore and
the literal meaning of its stipulations shall control.
To include the full payment of the obligations with the SSS and Apex as a condition would
be to unnecessarily stretch and put a new meaning to the provisions of the agreement. For, as a
general rule, when the terms of an agreement have been reduced to writing, such written
agreement is deemed to contain all the terms agreed upon and there can be, between the parties
(Sales and Lease),
Law)
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and their successors-in-interest, no evidence of such terms other than the contents of the written
agreement. And, it is a familiar doctrine in obligations and contracts that the parties are bound by
the stipulations, clauses, terms and conditions they have agreed to, which is the law between
them, the only limitation being that these stipulations, clauses, terms and conditions are not
contrary to law, morals, public order or public policy. Not being repugnant to any legal
proscription, the agreement entered into by the parties must be respected and each is bound to
fulfill what has been expressly stipulated therein.
But even if we consider the payment of the mortgage amortizations to the SSS and Apex as
a condition on which the sale is based on, still rescission would not be available since non-
compliance with such condition would just be a minor or casual breach thereof as it does not
defeat the very object of the parties in entering into the contract. A cursory reading of the
agreement easily reveals that the main consideration of the sale is the payment of P200,000 to the
vendors within the period agreed upon. The assumption of mortgage by the Leaño Spouses is a
natural consequence of their buying a mortgaged property. In fact, the Barredo Spouses do not
stand to benefit from the payment of the amortizations by the Leaño Spouses directly to the SSS
and Apex simply because the Barredo Spouses have already parted with their property, for which
they were already fully compensated in the amount of P200,000.
Fraud; Art. 1332; The party who seeks to enforce the contract has the burden of showing that
the other party fully understood the contents thereof.
ANDREA MAYOR, ET AL. vs. LOURDES MASANGKAY BELEN, ET AL.

[G.R. No. 151035, June 3, 2004.]
YNARES-SANTIAGO
FACTS: Petitioner Andrea Mayor was the original owner of a parcel of land. Respondent Lourdes M.
Belen purchased the subject property in consideration of P18,000 payable in installments. She was
able to pay P11,445 out of the P18,000 purchase price leaving a balance of P6,555 .
Lourdes sold back the subject property to Andrea Mayor in consideration of P18,000. For
this purpose, Lourdes executed the Kasulatan ng Bilihang Tuluyan in favor of Andrea Mayor.
Thereafter, Andrea Mayor obtained a loan from Lourdes Belen secured by a real estate mortgage
over the same property for which the latter executed a document denominated as Kasulatan ng
Sanglaan.
Lourdes filed a civil suit against Andrea Mayor, for annulment of the Kasulatang Bilihang
Tuluyan and Kasulatan ng Sanglaan. Respondent alleged, among others, that petitioner through co-
petitioner Vergel Romulo a.k.a. Virgilio Romulo, made her believe that the sale in her favor by
Andrea is void because the deed of conveyance did not reflect the true agreement of the parties as
to the mode of payment of the purchase price. Lourdes further averred that she was also made to
believe that she might lose what she had already paid which amounted to 70% of the purchase
price. She was convinced by the representations of Andrea and Rumulo that it would be best for
the latter to make it appear that Andrea was merely mortgaging the subject property to her. It
was in the light of the foregoing that Lourdes Belen sought the annulment of the aforesaid
contracts because her consent in the execution thereof was obtained through fraud and undue
influence.
In her answer with counterclaim, Andrea Mayor denied the material allegations of the
complaint insisting, in sum, that Lourdes M. Belen freely and voluntarily executed the subject
contracts and the same is binding on the parties thereto.
After trial, the court a quo rendered judgment in favor of herein respondents. On appeal,
the assailed decision of the court a quo was affirmed by the appellate court
ISSUE: Was the execution of the Kasulatan ng Bilihan and Kasulatan ng Sanglaan tainted with
fraud?
HELD: YES. As defined, fraud refers to all kinds of deception, whether through insidious
machination, manipulation, concealment or misrepresentation to lead another party into error.

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The deceit employed must be serious. It must be sufficient to impress or lead an ordinarily prudent
person into error, taking into account the circumstances of each case.
Impressive as the arguments petitioners have advanced in support of their cause may be,
the fatal flaw lies in their inability to convincingly substantiate their claim that Lourdes M. Belen
signed the contracts freely and voluntarily.
This brings to the fore Lourdes M. Belen's limited educational attainment. While indeed
petitioners point out that the deeds denominated as Kasulatan ng Bilihang Tuluyan and Kasulatan
ng Sanglaan were executed in Tagalog, a close scrutiny thereof shows that they are practically
literal translations of their English counterparts. Thus, the mere fact that the documents were
executed in the vernacular neither clarified nor simplified matters for Lourdes who admitted on
cross-examination that she merely finished Grade 3, could write a little, and understand a little of
the Tagalog language.
The appellate court could not then be faulted when it invoked Article 1332 of the Civil
Code which states:
ART. 1332. When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the former.
As aptly pointed out by the Court of Appeals, the principle that a party is presumed to
know the import of a document to which he affixes his signature is modified by the foregoing
article. Under the said article, where a party is unable to read or when the contract is in a
language not understood by a party and mistake or fraud is alleged, the obligation to show that the
terms of the contract had been fully explained to said party who is unable to read or understand
the language of the contract devolves on the party seeking to enforce it. The burden rests upon the
party who seeks to enforce the contract to show that the other party fully understood the contents
of the document. If he fails to discharge this burden, the presumption of mistake, if not, fraud,
stands unrebutted and controlling.
Concededly, both the Kasulatan ng Bilihang Tuluyan and the Kasulatan ng Sanglaan are
public documents and there is no dispute that generally, a notarized document carries the
evidentiary weight conferred upon it with respect to its due execution. In addition, documents
acknowledged before a notary public have in their favor the presumption of regularity. However,
the presumption is not absolute and may be rebutted by clear and convincing evidence to the
contrary. The presumption cannot be made to apply in this case because the regularity in the
execution of the documents were challenged in the proceedings below where their prima facie
validity was overthrown by the highly questionable circumstances pointed out by both trial and
appellate courts. Furthermore, notarization per se is not a guarantee of the validity of the contents
of a document. Indeed, as stated by the Supreme Court in Nazareno v. CA:
The fact that the deed of sale was notarized is not a guarantee of the validity of its
contents. As held in Suntay v. Court of Appeals:
Though the notarization of the deed of sale in question vests in its favor the presumption of
regularity, it is not the intention nor the function of the notary public to validate and make binding
an instrument never, in the first place, intended to have any binding legal effect upon the parties
thereto. The intention of the parties still and always is the primary consideration in determining
the true nature of the contract.
The impugned documents cannot be presumed as valid because of the direct challenge
posed thereto by respondents, which is precisely the reason for the commencement of this case: to
bring to the fore the irregularity in their execution.
There are, moreover, other factual circumstances pointed out by both the trial and
appellate courts which militate against the contention of petitioners. The evidence on record shows
that the respondents Belens intended to stay and occupy the subject land for a considerable length
of time. As borne out by the records, respondents bought from Celita Bordeos the house standing
on the subject land then owned by Andrea Mayor. Four years later or on November 27, 1979,
respondents bought the subject land from petitioner Andrea Mayor.
They bought the said land through installments and already paid P11,445.00 of the
P18,000.00 purchase price. They also caused the transfer in their names of the tax declarations
over the subject land and house. This they did even before they could have completed the payment
(Sales and Lease),
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of the purchase price. In short, their intention and desire to stay on the property is very evident.
Petitioners' suggestion, therefore, that respondents made a sudden volte face and decided to resell
the property to them — seven months from the date of the property's acquisition, after payment of
almost two-thirds of the purchase price and transferring the tax declarations thereof in
respondents' names, borders on the absurd and the incredible. It simply is contrary to human
experience for respondents to have had a hasty change of heart to dispose of the land on which
they intend to make their home and upon which they had invested so much.
DEMPBY
MINORS
Incapacity of one of the parties to give his consent renders the contract merely voidable under
the Old Civil Code
SAMAHAN NG MAGSASAKA SA SAN JOSEP vs. MARIETTA VALISNO, ET AL.

[G.R. No. 158314, June 3, 2004.]
PANGANIBAN
FACTS: The original 57-hectare property, situated in La Fuente, Sta. Rosa, Nueva Ecija, was
formerly registered in the name of Dr. Nicolas Valisno, Sr. Before the effectivity of Presidential
Decree No. 27, the land was the subject of a judicial ejectment suit, whereby in 1971, the
Valisnos' tenants were ejected from the property. Among these tenants was Dominador Maglalang,
who represents the SMSJ in the instant proceedings.
Dr. Valisno mortgaged 12 hectares of his property to Renato and Angelito Banting.
Thereafter, the property was subdivided into ten lots and individual titles were issued in the name
of the eight children of Nicolas, Angelito Banting, and Renato Banting. After the mortgage on the
12 hectare portion was foreclosed and the property sold at public auction, four grandchildren of Dr.
Nicolas Valisno redeemed the same from the mortgagee. At the time of the redemption, three of
the redemptioners (3) were minors; only one (1) was of legal age. The redemption was made on
October 25, 1973, but the titles to the land were not transferred to the redemptioners until
November 26, 1998.
Subsequently, the entire 57-hectare property became the subject of expropriation
proceedings before the Department of Agrarian Reform ("DAR"). In 1994, Dominador Maglalang,
filed a petition for coverage of the subject landholding under the CARL. DAR Provincial Agrarian
Reform Officer ("PARO"), issued a Memorandum stating that the property had been subdivided
among the heirs of Dr. Valisno Sr. before the issuance of PD 27 into tracts of approximately six
hectares each. Nevertheless, PARO added that the excess over the five-hectare retention limit
could still be covered under RA 6657. On appeal, the Regional Director declared that the Valisno
property was exempt from the coverage of PD 27 and RA 6657. Secretary Garilao, however,
reversed the above decision and held that the property was covered by the CARP.
Thereafter, the Valisno heirs filed a Consolidated Application for retention which was
opposed by herein petitioner on the ground that the former were not actually tilling nor directly
managing the land in question as required by law. Judgment was rendered against herein private
respondents by the DAR Secretary on the ground that three of the Valisno heirs were minors at the
tie of the redemption, hence without any legal capacity. On appeal, the Court of Appeals reversed
the above decision and affirmed the retention rights of the redemptioner-grandchildren over three
hectares each.
ISSUE: Was the redemption made in 1973 when the redemptioner-grandchildren were still minors
valid?
HELD: YES. The relevant laws governing the minors' redemption in 1973 are the general Civil
Code provisions on legal capacity to enter into contractual relations. Article 1327 of the Civil Code
provides that minors are incapable of giving consent to a contract. Article 1390 provides that a
contract where one of the parties is incapable of giving consent is voidable or annullable. Thus, the
redemption made by the minors in 1973 was merely voidable or annullable, and was not void ab
initio, as petitioners argue.
Any action for the annulment of the contracts thus entered into by the minors would
require that: (1) the plaintiff must have an interest in the contract; and (2) the action must be
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brought by the victim and not the party responsible for the defect. Thus, Article 1397 of the Civil
Code provides in part that "[t]he action for the annulment of contracts may be instituted by all who
are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the
incapacity of those with whom they contracted." The action to annul the minors' redemption in
1973, therefore, was one that could only have been initiated by the minors themselves, as the
victims or the aggrieved parties in whom the law itself vests the right to file suit. This action was
never initiated by the minors. We thus quote with approval the ratiocination of the Court of
Appeals:
Respondents contend that the redemption made by the petitioners was simulated,
calculated to avoid the effects of agrarian reform considering that at the time of redemption the
latter were still minors and could not have resources, in their own right, to pay the price thereof.
We are not persuaded. While it is true that a transaction entered into by a party who is
incapable of consent is voidable, however such transaction is valid until annulled. The redemption
made by the four petitioners has never been annulled, thus, it is valid.
Loans; Mortgage: Conditions precedent are not favored; Registered mortgage lien; Effect of
partial failure of consideration
PHILIPPINE NATIONAL BANK vs. RBL ENTERPRISES, INC., ET. AL.

[G.R. NO. 149569. MAY 28, 2004.]
PANGANIBAN
FACTS: Respondents opened a prawn hatchery in San Enrique, Negros Occidental, and for this
purpose, leased from Nelly Bedrejo a parcel of land. In order to increase productions and improve
the hatchery facilities, respondents applied for and was approved a loan of P2,000,000.00, by PNB.
To secure its payment, respondents executed in favor of PNB, a real estate mortgage over two (2)
parcels of land, and another real estate and chattel mortgage over the buildings, culture tanks and
other hatchery facilities located in the leased property of Nelly Bedrejo.
PNB partially released to respondents on several dates, the total sum of P1,000,000.00 less
the advance interests. During the mid-part of the construction of the improvements, PNB refused
to release the balance of P1,000,000.00 allegedly because respondents failed to comply with the
bank's requirement that Nelly Bedrejo should execute an undertaking or a 'lessors' conformity'
provided in Real Estate and Chattel Mortgage contract which states in part that “It is a condition
of this mortgage that while the obligations remained unpaid, the acquisition by the lessor of the
permanent improvements covered by this Real Estate Mortgage as provided for in the covering
Lease Contract, shall be subject to this mortgage. For this purpose, the mortgagor hereby
undertakes to secure the lessor's conformity hereto'.. PNB foreclosed the mortgaged properties, to
the detriment of respondents, causing losses and ultimately, the closure of the business.
Respondents instituted an action against petitioner PNB and the Provincial Sheriff of Negros
Occidental. PNB filed its Answer with Counterclaim alleging that the lessors' conformity was not an
additional requirement but was already part of the terms and conditions and that the release of the
balance of the loan was conditioned on the compliance and submission by the respondents of the
required lessors' conformity.
The trial court found that PNB was guilty of breaching its obligation under the contract of
loan and held them liable for the damages suffered by respondents. The above decision was
affirmed by the appellate court.
ISSUES:
1. Was the non-release of the balance of the loan by PNB due to failure of respondents to
comply with the condition precedent justified?
2. Is PNB correct in asserting that the lessor, being a beneficiary, should be compelled to
sign the contract?
HELD: 1. NO. If the parties truly intended to suspend the release of the P1,000,000 balance of
the loan until the lessor's conformity to the Mortgage Contract would have been obtained, such
(Sales and Lease),
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condition should have been plainly stipulated either in that Contract or in the Credit Agreement.
The tenor of the language used in paragraph. 9.07, as well as its position relative to the whole
Contract, negated the supposed intention to make the release of the loan subject to the fulfillment
of the clause. From a mere reading thereof, respondents could not reasonably be expected to know
that it was petitioner's unilateral intention to suspend the release of the P1,000,000 balance until
the lessor's conformity to the Mortgage Contract would have been obtained.
Respondents had complied with all the requirements set forth in the recommendation and
approval sheet forwarded by petitioner's main office to the Bacolod branch for implementation;
and the Credit Agreement had been executed thereafter. Naturally, respondents were led to
believe and to expect the full release of their approved loan accommodation. This belief was
bolstered by the initial release of the first P1,000,000 portion of the loan.
Conditions precedent are not favored. Unless impelled by plain and unambiguous language
or by necessary implication, courts will not construe a stipulation as laden with such burden,
particularly when that stipulation would result in a forfeiture or in inequitable consequences.
Nowhere did PNB explicitly state that the release of the second half of the loan
accommodation was subject to the mortgagor's procurement of the lessor's conformity to the
Mortgage Contract. Absent such a condition, the efficacy of the Credit Agreement stood, and
petitioner was obligated to release the balance of the loan. Its refusal to do so constituted a
breach of its reciprocal obligation under the Loan Agreement.
2 NO. Flimsy was the insistence of petitioner that the lessor should be compelled to sign
the Mortgage Contract, since she was allegedly a beneficiary thereof. The chattel mortgage was a
mere accessory to the contract of loan executed between PNB and RBL. The latter was
undisputably the absolute owner of the properties covered by the chattel mortgage. Clearly, the
lessor was never a party to either the loan or the Mortgage Contract.
The records show that all the real estate and chattel mortgages were registered with the
Register of Deeds of Bago City, Negros Occidental, and annotated at the back of the mortgaged
titles. Thus, petitioner had ample security to protect its interest. As correctly held by the appellate
court, the lessor's nonconformity to the Mortgage Contract would not cause petitioner any undue
prejudice or disadvantage, because the registration and the annotation were considered sufficient
notice to third parties that the property was subject to an encumbrance.
Article 2126 of the Civil Code describes the real nature of a mortgage: it is a real right
following the property, such that in subsequent transfers by the mortgagor, the transferee must
respect the mortgage. A registered mortgage lien is considered inseparable from the property
inasmuch as it is a right in rem. The mortgage creates a real right or a lien which, after being
recorded, follows the chattel wherever it goes. Under Article 2129 of the same Code, the mortgage
on the property may still be foreclosed despite the transfer.
Indeed, even if the mortgaged property is in the possession of the debtor, the creditor is
still protected. To protect the latter from the former's possible disposal of the property, the
chattel mortgage is made effective against third persons by the process of registration.
Since PNB failed to release the P1,000,000 balance of the loan, the Real Estate and Chattel
Mortgage Contract became unenforceable to that extent. Relevantly, we quote this Court's ruling in
Central Bank of the Philippines v. Court of Appeals:
"The consideration of the accessory contract of real estate mortgage is the same as that of
the principal contract. For the debtor, the consideration of his obligation to pay is the existence of
a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt.
xxx xxx xxx
"[W]hen there is partial failure of consideration, the mortgage becomes unenforceable to
the extent of such failure. Where the indebtedness actually owing to the holder of the mortgage is
less than the sum named in the mortgage, the mortgage cannot be enforced for more than the
actual sum due."
NATURE OF AN AIRLINE’S CONTRACT OF CARRIAGE; AWARDING OF DAMAGES; LACHES
CHINA AIRLINES, LTD. vs. COURT OF APPEALS

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[G.R. No. 129988. July 14, 2003.]
CARPIO
FACTS: Sometime in the first week of June 1990, private respondents planned to travel to Los
Angeles, California to pursue a cable business deal involving the distribution of Filipino films and
programs in Los Angeles. Initially, Morelia Travel Agency booked private respondents' flight with
Petitioner China Airlines Ltd. ("CAL"). Morelia scheduled the flight for Manila-Taipei-Los Angeles on
June 13, 1990. On discovering that Morelia charged higher rates than American Express Travel
Service Philippines ("Amexco"), private respondents dropped the services of Morelia. Instead,
private respondents engaged the services of Amexco through Lao who was an Amexco cardholder.
On 11 June 1990, Lao called up Amexco claiming that he and Salvador had a confirmed
booking with CAL. Lao then gave to Amexco tire record locator number or booking reference
number (No. 4RJ2CJ) that CAL had previously issued to Morelia when Morelia booked the
reservations of private respondents. In the afternoon of the same day, Amexco called up CAL to
finalize private respondents' reservation for CAL's June 13, 1990 flight. Amexco used the record
locator number given by Lao in confirming the reservations of private respondents. CAL confirmed
the booking. Amexco then issued to private respondents the confirmed tickets for the June 13,
1990 flight of CAL. On the same day, CAL called up Morelia to reconfirm the reservations of private
respondents. Morelia cancelled the reservations of private respondents.
On 13 June 1990, private respondents were at the airport to board CAL Flight 632 but CAL
personnel prevented them from boarding the airplane because their names were not in the
passengers' manifest. CAL cancelled the reservations when Morelia revoked the booking it had made
for private respondents. Private respondents were only able to leave for Los Angeles the following
day on a different airline, Northwest Airlines ("Northwest"). Private respondents through counsel
sent a demand letter to CAL for payment of moral damages totaling P500,000. CAL, asserting that it
had done all it can to inform private respondents of the cancellation and that the travel agencies,
not the airline were at fault.It also alleged that the present action had now been barred by laches.
The trial court ruled in favor of private respondents, and held that CAL had knowledge of the fact
that Amexco, using the reference number earlier booked by Morelia, had allowed the confirmation
of the reservation, despite its knowledge of the prohibition of travel agencies using bookings
reserved by another travel agency. CAL, in reconfirming, called Morelia who advised them to cancel
the reservation, knowing fully well that it was Amexco who contacted CAL to confirm the
reservation. The trial court ruled that CAL was not sincere in its efforts to contact private
respondents before it cancelled their reservations as they asserted, otherwise, it would have
contacted Amexco and informed them of such prohibition and not Morelia. The trial court awarded
private respondents P100,000 as moral damages, P50,000 as exemplary damages and P50,000 as
attorney's fees. However, the trial court ruled that private respondents are not entitled to actual
damages for the costs of their Northwest plane tickets and the car rental expenses they incurred in
proceeding to San Francisco. The trial court held that these expenses were necessary in their
pursuit of their cable business deal. The trial court also denied the claim of private respondents for
payment of unrealized income. On appeal, the decision of the trial court was affirmed, hence the
present petition.
ISSUES:
1. Have laches set in and barred the present action?
2. Is petitioner liable for moral and exemplary damages on account of bad faith?
HELD: 1. NO. We are not convinced that laches has barred the present action. The essence of
laches or "stale demands" is the "failure or neglect for an unreasonable and unexplained length of
time to do that which, by exercising due diligence, could or should have been done earlier, thus
giving rise to a presumption that the party entitled to assert it either has abandoned or declined to
assert it."
Private respondents' action is based on a written contract. Article 1144(1) of the Civil Code
provides that the prescriptive period for an action on a written contract is 10 years from the time
the right of action accrues. Private respondents' right of action accrued on 13 June 1990 when CAL
(Sales and Lease),
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disallowed them from boarding its flight. Private respondents filed this case on 11 June 1992.
Clearly, private respondents did not tarry in vindicating their claim when they filed this suit within
the 10-year period expressly provided by law. Moreover, private respondents vigorously pursued
their claim as shown by the demand letters that they sent CAL and Amexco before filing this case.
The nature of an airline's contract of carriage partakes of two types, namely: (1) a contract
to deliver a cargo or merchandise to its destination, and (2) a contract to transport passengers to
their destination. In this case, when CAL confirmed the reservations, it bound itself to transport
private respondents on its flight on 13 June 1990.
The airline business is intended to serve the traveling public primarily and is thus imbued
with public interest. The law governing common carriers consequently imposes an exacting
standard. Thus, in an action based on a breach of contract of carriage, the aggrieved party does not
have to prove that the common carrier was at fault or was negligent. All that he has to prove is the
existence of the contract and the fact of its non-performance by the carrier.
CAL did not allow private respondents, who were then in possession of the confirmed
tickets, from boarding its airplane because their names were not in the passengers' manifest.
Clearly, CAL breached its contract of carriage with private respondents. We, however, rule out bad
faith by CAL.
2. NO. CAL's negligence caused it to breach its contract of carriage. CAL's negligence is,
however, not so gross to amount to bad faith. Mere negligence, even if it causes the plaintiff to
suffer mental anguish or serious fright, is not a ground for awarding moral damages.
The law distinguishes a contractual breach effected in good faith from one attended by bad
faith. Absent fraud or bad faith on defendant's part in breaching his contract, his liability for
damages is limited to the natural and probable consequences of the breach of the obligation, which
the parties had foreseen or could have reasonably foreseen. In such a case, the liability would not
include moral damages. For this reason, not every case of mental anguish, fright or serious anxiety
calls for the award of moral damages.
As for exemplary damages, Article 2232 of the Civil Code provides that in a contractual or
quasi-contractual relationship, exemplary damages may be awarded only if the defendant had
acted in "a wanton, fraudulent, reckless, oppressive or malevolent manner." CAL was not in bad
faith and its employees did not act in a wanton, fraudulent, reckless, oppressive or malevolent
manner. The award of exemplary damages is therefore unwarranted in this case.
Private respondents' remaining claim is for actual damages. However, private respondents
did not shell out any money for their CAL tickets. Amexco voided the CAL tickets when private
respondents requested Amexco to book them in another airline. Amexco eventually booked their
flight with Northwest. Private respondents would have been entitled to the price difference
between the tickets of CAL and Northwest had the latter cost more than the former. The price
difference would have been a damage reasonably attributed to CAL's breach of its contract of
carriage because private respondents would not have flown via Northwest were it not for CAL's non-
performance of its obligation. The evidence, however, shows that the Northwest tickets at US$625
each cost less than the CAL tickets priced at US$629 each. We cannot also order a reimbursement
of the Northwest tickets because this would have enabled private respondents to fly to Los Angeles
without paying any fare. As correctly pointed out by the trial and appellate courts, the costs of the
airplane tickets were a necessary expense that private respondents could not pass on to CAL.
Undeniably, however, private respondents soldered some form of injury. CAL confirmed the
reservations of private respondents carelessly. Private respondents relied on this confirmation.
When plaintiff suffers some species of injury not enough to warrant an award of actual damages,
the court may award nominal damages. The court may award nominal damages purely to vindicate
a right of a plaintiff which defendant has violated and not to indemnify any loss the plaintiff has
suffered. The court may award nominal damages in every obligation arising from any source
enumerated in Article 1157 of the Civil Code, or in any case where there is an invasion of any
property right.
SALES AND LEASE

Absolute Sale VERSUS Equitable Mortgage
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SPOUSES CRISPIN AUSTRIA and LEONISA HILARIO vs. SPOUSES DANILO and VERONICA GONZALES
[G.R. No. 147321, January 21, 2004.]
QUISUMBING
FACTS: Petitioner-spouses alleged that they are the owners and possessors of three (3) parcels of
land which were covered by three transfer certificates of title, all in the name of petitioner
Leonisa Hilario. The said parcels of land became the subject of two (2) Deeds of Absolute Sale for
the price of P50,000.00 and P240,000.00 respectively. Both deeds were executed by petitioner
Leonisa Hilario in favor of the respondent-spouses. But petitioners claimed that the transactions
entered into were not actually sales but merely loans in the amount of P260,000.00. According to
the petitioners, they used the said amount to redeem some mortgaged properties from the Rural
Bank of Pandi, Bulacan. However, in order to secure the loan, respondents required petitioners to
furnish them with ten (10) TCTs. Three of these certificates covered the subject properties in this
case while the other seven belonged to their relatives.
According to petitioners, respondents thereafter registered the disputed properties in their
own names through the use of fraud, misrepresentation and falsification using the fictitious
contracts of sale. Petitioners alleged that they came to know of said acts of respondents only when
they were served with a notice to vacate said lots. Thus, petitioner-spouses instituted a civil action
for declaration of nullity and reconveyance before the Regional Trial Court.
In their answer, respondents insisted that petitioner Leonisa Hilario sold to them the three
lots in question. Respondent Veronica Gonzales agreed to buy the same out of pity for petitioners.
The transaction embodied in a deed of absolute sale was for the price of P240,000.00. However,
before the properties were registered, petitioner Leonisa Hilario wrote a letter requesting for the
execution of another deed of absolute sale indicating P50,000.00 as the price purportedly to lessen
the taxes and fees that they will be paying as the vendors. A new deed of absolute sale indicating a
selling price of P50,000.00 for the 3 lots was executed and notarized. Shortly thereafter, the titles
of said lots were transferred to the respondents.
Respondents wrote to petitioners asking them to vacate the disputed properties and
thereafter the latter sent an UNDERTAKING promising to vacate and surrender possession of the
properties. But then petitioners failed to vacate as promised on the given date. Their failure to
vacate and turn over the purchased lots prompted the respondents to send a final demand letter
but the same fell on deaf ears. As a result, respondents filed an ejectment suit against the
petitioners before the Municipal Trial Court. The trial court decided in favor of the respondents.
Hence, the petitioners elevated their case to the Regional Trial Court. After trial on the merits, the
RTC rendered a decision in favor of the petitioners. Upon appeal to the Court of Appeals, the
appellate court reversed the trial court’s decision.
Hence, the instant petition.
ISSUE: Whether the transaction involves an absolute sale or an equitable mortgage of real
property.
HELD: Absolute sale. Decisive for the proper determination of the true nature of the transaction
between the parties is the intent of the parties. There is no conclusive test to determine whether a
deed absolute on its face is really a simple loan accommodation secured by a mortgage. To
determine whether a deed absolute in form is a mortgage in reality, the court is not limited to the
written memorials of the transaction. This is so because the decisive factor in evaluating such
agreement is the intention of the parties, as shown not necessarily by the terminology used in the
contract but by all the surrounding circumstances, such as the relative situations of the parties at
that time; the attitudes, acts, conduct, and declarations of the parties; the negotiations between
them leading to the deed; and generally, all pertinent facts having a tendency to fix and determine
the real nature of their design and understanding. As such, documentary and parol evidence may be
submitted and admitted to prove the intention of the parties.
At first blush, petitioners appear persuasive in invoking the presumption created by Articles
1602 and 1604 of the Civil Code as to an equitable mortgage. Petitioners point out that the
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requirements of an equitable mortgage have been satisfied by the following circumstances, to wit:
(1) inadequacy of the selling price; (2) possession in the premises, and (3) payment of realty taxes.
However, such presumption of equitable mortgage is not conclusive. It may be rebutted by
competent and satisfactory proof to the contrary. In the instant case, petitioners' claim that the
selling price of the lots in question was inadequate needs closer scrutiny. Petitioners' allegation
that the insufficiency of the selling price creates the presumption that the transaction is an
equitable mortgage is unsupported by the evidence on record. Petitioners failed to present any
proof whatsoever that the fair market values of the real property in the area at the time of the
transaction were much higher than the selling price of the parcels in question. Mere allegation that
the price paid by respondents was inadequate, without more, does not make a case favorable to
petitioners. Moreover, there is candid testimony by respondents that the actual price paid was
P240, 000. This testimony was buttressed by a letter dated July 20, 1983, written by petitioner
Leonisa H. Antonio that a price be put in the deed lower than what was actually paid, so as to
lower the seller's taxes, fees, and other expenses.
As to the allegation that petitioners were in possession of the properties even after the
sale, it is obviated by the fact that they executed an undertaking promising to vacate the premises.
But they repeatedly delayed honoring it. The records also show that they did not object when
improvements were made on the premises by respondents.
Petitioners insist that they entered into a contract only to obtain a loan with respondents
and nothing more. Petitioners failed, however, to present a copy of said contract in the
proceedings before the RTC, nor could they testify as to its details. Petitioners surely cannot now
pretend to be ignorant of the real nature of their transaction with respondents. For this was not
the first time they dealt with each other. Petitioner Crispin Austria even admitted in his testimony
that he knew the meaning of the phrase "hereby sell, transfer and convey" and "deed of sale". But
he was less than candid in his testimony under oath. While he could identify his own signature in
the Complaint, he was struck with selective amnesia when shown the same signature in the Deed of
Sale. Moreover, he failed to rebut the testimony of the Notary Public who testified in court that the
petitioners as vendors of the properties personally appeared and acknowledged the sale documents
before him.
SALES; Perfected Contract of Sale; Consent

CONTRACTS: Statute of Frauds
PROPERTY: Builder in Good Faith
DAMAGES: Actual, Nominal, Moral, and Compensatory
SPOUSES CONSTANTE AND AZUCENA E. FIRME vs. BUKAL ENTERPRISES AND DEV’T CORP.
[G.R. No. 146608. October 23, 2003.]
CARPIO
FACTS: Petitioner Spouses Constante and Azucena Firme are the registered owners of a parcel of
land located in Quezon City. Renato de Castro, the vice president of Bukal Enterprises and
Development Corporation (Bukal Enterprises) authorized his friend, Teodoro Aviles, a broker, to
negotiate with the Spouses Firme for the purchase of the Property.
On 28 March 1995, Bukal Enterprises filed a complaint for specific performance and
damages with the trial court, alleging that the Spouses Firme reneged on their agreement to sell
the Property. During the trial, witnesses for Bukal Enterprises testified that The Spouses Firme
rejected this First Draft because of several objectionable conditions, including the payment of
capital gains and other government taxes by the seller and the relocation of the squatters at the
seller's expense. The Second Draft was presented and The Spouses Firme allegedly accepted the
Second Draft in view of the deletion of the objectionable conditions contained in the First Draft.
However, the Spouses Firme subsequently decided that they were no longer interested in selling
the property. A Third Draft was again presented to the Spouses Firme but was rejected by the
latter.
The trial court ruled against Bukal Enterprises and held there was no perfected contract of
sale. Bukal Enterprises failed to establish that the Spouses Firme gave their consent to the sale of
the Property. The parties did not go beyond the negotiation stage and there was no evidence of
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meeting of the minds between the parties. The CA reversed and set aside the decision of the trial
court. Hence, this petition.
ISSUES:
1. Was there a perfected contract of sale between the Spouses Firme and Bukal
Enterprises?
2. Is the Statutes of Frauds applicable in the present action?
3. Is Bukal Enterprises a builder in good faith?
4. Are the Spouses Firme entitled to an award of damages?
HELD: 1. NO. First, the records indubitably show that there was no consent on the part of the
Spouses Firme. Witness Aviles did not present any draft deed of sale during his first meeting with
the Spouses Firme on 30 January 1995. Witness Dr. Firme was consistent in his testimony that he
and his wife rejected the provisions of the Third Draft presented by Aviles during their second
meeting on 6 February 1995. The Spouses Firme found the terms and conditions unacceptable and
told Aviles that they would not sell the property. Aviles showed them only one draft deed of sale
(Third Draft) during their second and last meeting on 6 February 1995. When shown a copy of the
First Draft, Dr. Firme testified that it was not the deed of sale shown to them by Aviles during their
second meeting 26 and that the Third Draft was completely different from the First Draft.
2. NO. There was no perfected contract of sale. There is therefore no basis for the
application of the Statute of Frauds. The application of the Statute of Frauds presupposes the
existence of a perfected contract.
3. NO. Bukal Enterprises is not a builder in good faith. The Spouses Firme did not accept
Aviles' offer to purchase the Property. Aviles testified that when he called the Spouses Firme on 2
March 1995, Dr. Firme informed him that they were no longer interested in selling the Property. On
4 March 1995, Aviles called again and this time Mrs. Firme told him that they were not selling the
Property. Aviles informed De Castro of the refusal of the Spouses Firme to sell the Property.
However, Bukal Enterprises still proceeded in relocating the squatters and constructing
improvements on the Property.
Bukal Enterprises is obviously a builder in bad faith. No deed of sale has been executed in
this case. Despite the refusal of the Spouses Firme to sell the Property, Bukal Enterprises still
proceeded to introduce improvements on the Property. Bukal Enterprises introduced improvements
on the Property without the knowledge and consent of the Spouses Firme. When the Spouses Firme
learned about the unauthorized constructions made by Bukal Enterprises on the Property, they
advised the latter to desist from further acts of trespass on their Property.
4. NO. The Spouses Firme are not entitled to compensatory and moral damages.
In awarding actual damages, the trial court took into account the traveling expenses
incurred by the Spouses Firme who are already residing in the United States. However, the trial
court failed to consider the testimony of Dr. Firme that they normally travel to the Philippines
more than once a year to visit their children. Thus, the expenses for the roundtrip tickets dated
1996-1997 could not be attributed solely for the attendance of hearings in the case.
Nevertheless, an award of nominal damages of P30,000 is warranted since Bukal Enterprises
violated the property rights of the Spouses Firme.
Duty of the lessor to maintain lessee in quiet and peaceful possession of the leased premises

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CHUA TEE DEE vs. COURT OF APPEALS

[G.R. No. 135721. May 27, 2004.]
CALLEJO, SR.
FACTS: J.C. Agricom Development Corporation, Inc. (Agricom), is the owner of a rubber plantation
located at Davao City. Agricom planned to lease the plantation. Chua Tee Dee, married to Amado
Dee, is a businesswoman doing business under the name of Pioneer Enterprises (Pioneer). Manuel G.
Alba, the president of Agricom, had a business meeting in Davao City with Amado Dee where they
discussed the possibility of leasing the rubber plantation to Chua Tee Dee/Pioneer. A contract of
lease was entered into by Agricom, represented by Alba, and Chua Tee Dee doing business under
the name and style Pioneer . Lillian Carriedo, a stockholder of Agricom, also signed the contract.
Thereafter, Alba informed the employees of the rubber plantation of the impending
termination of their employment due to the company's contract of lease with Chua Tee Dee. The
employees were told that they would be given separation pay.
On June 3, 1985, Amado Dee delivered the amount of P270,000.00 to the Spouses Alba as
deposit for the lease. In the meantime, Agricom sent letters to the said employees, confirming the
termination of their employment and informing of their separation pay. The severed employees the
filed a complaint for illegal dismissal and unfair labor practice against Agricom, Amado Dee and
Pioneer. The labor arbiter rendered his decision holding that the termination of the complainants'
employment was illegal, but the complaint for unfair labor practice was dismissed for lack of merit.
On May 24, 1990, the counsel of the Carriedo heirs, the stockholders-owners of Agricom,
sent a telegraphic note to Amado Dee demanding payment of long overdue rentals. Pioneer sent a
letter to Agricom complaining of facts and events which disrupted its operations in the plantation.
Pioneer claimed that it was dragged into labor disputes not of its own making and complained of
being pestered by some individuals who claimed portions of the plantation as their own property.
Some of them went to its office and even presented tax declarations to prove their claims. Agricom
informed Pioneer that, after due investigation, it concluded that the latter's complaints were
unfounded. It also demanded the payment of back rentals for June, July and August 1990. As
Pioneer was unable to pay its monthly rentals, Agricom filed, on September 4, 1990, a civil action
for sum of money, damages and attorney's fees against Chua Tee Dee. In her Answer, Chua Tee Dee
asserted that Agricom had no cause of action against her. She claimed that it was Agricom which
failed to comply with the terms and conditions of the contract of lease when it failed to settle the
labor dispute with its former employees, and that Agricom failed to maintain her in the quiet and
peaceful possession and enjoyment of the leased premises during the effectivity of the lease
contract. The RTC rendered judgment dismissing the complaint and declaring the lease contract
terminated for failure of Agricom to implement the terms thereof. Agricom then filed a Motion for
Reconsideration, which was granted by the RTC. Judgment was rendered ordering Chua Tee Dee to
pay to Agricom several amounts due as back rentals, including the first 3 years of the lease. The CA
affirmed the order of the lower court, with modification as to the award of attorney's fees. Hence,
this petition filed by Chua Tee Dee.
ISSUE: Did Agricom fail to maintain Chua Tee Dee in a quiet and peaceful enjoyment of the leased
premises?
HELD: NO. As lessor, Agricom had the duty to maintain Chua Tee Dee in the peaceful and
adequate enjoyment of the leased premises. Such duty was made as part of the contract of lease
entered into by the parties. Even if it had not been so, the lessor is still duty-bound under Art.1654
of the Civil Code. The duty "to maintain the lessee in the peaceful and adequate enjoyment of the
lease for the duration of the contract" mentioned in No. 3 of the article is merely a warranty that
the lessee shall not be disturbed in his legal, and not physical, possession.
In the case at bar, Chua Tee Dee claims that several people presented tax declarations to
her and claimed some portions of the leased premises. However, no case was filed by any of the
said claimants against her or her lessor during the time she occupied the premises. Patently, then,
Chua Tee Dee had not been disturbed in her legal possession of the property in derogation of
Article 1654 of the New Civil Code. When Chua Tee Dee's representative saw that a portion of the
leased premises was being fenced by the claimants, she had all the right to sue the intruders who
had disturbed her physical possession as provided for in Article 1654 of the New Civil Code.
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However, the petitioner did not file any suit against any of the claimants. Thus, it cannot be said
that Agricom violated the contract of lease.
Chua Tee Dee failed to prove that she suffered any loss from the labor case that was filed
against her enterprise and her husband. True, the labor case was instituted during the effectivity of
the lease contract until the case was finally resolved on August 22, 1986. Surprisingly, however,
during the interregnum, appellant regularly paid the monthly rentals for the years 1985 to 1989. It
was after the labor case has been resolved that appellant started to fail to pay her rentals, strongly
indicating that the labor case has not dampened her peaceful and adequate possession of the
leased premises. The NLRC case did not deter the continuance of the possession and occupation of
the leased premises. In sum, then, the petitioner failed to prove that the private respondent
breached any of the provisions of the contract of lease. Thus, the petitioner had no valid reason to
suspend the payment of rentals under Art. 1658.
Chua Tee Dee’s obligation to pay back rentals should cover only the period of July 1990
until the time that she vacated the leased premises. The CA, thus, erred when it affirmed the order
of the trial court ordering the petitioner to pay back rentals, including the first three (3) years of
the lease, as that period had already been paid by the petitioner. The petitioner should also be
credited for the amount of P270,000.00 she paid to the private respondent as deposit for the lease.
Requisites for the Presumption of an Equitable Mortgage to arise
ERLINDA SAN PEDRO vs. RUBEN LEE and LILIAN SISON

[G.R. No. 156522. May 28, 2004.]
YNARES-SANTIAGO
FACTS: Petitioner Erlinda San Pedro initiated this suit against the spouses Ruben Lee and Lilian
Sison praying for: (1) a declaration that the document entitled "Kasulatan ng Ganap na Bilihan ng
Lupa" is an equitable mortgage and not a sale; (2) the reconveyance of the property subject of the
"Kasulatan ng Ganap na Bilihan ng Lupa"; and (3) damages.
Petitioner is the registered owner of a parcel of land located at San Juan, Balagtas,
Bulacan. She maintains that sometime in 1985, when she was in dire need of money for the
matriculation of her children, one Philip dela Torre introduced here to herein private respondents
who agreed to lend her P105,000.00 with P45,000.00 interest. The above loan was secured by a
real estate mortgage covering the abovementioned property. Furthermore, it is alleged by
petitioner that she was induced to sign a document denominated as "Kasulatan ng Ganap na Bilihan
ng Lupa" after herein private respondents and Atty. Roxas assured her that the aforesaid document
was only for formality purposes and would not be enforced against her.
In 1986, when petitioner was about to pay the real estate taxes to the disputed property,
she was surprised when she was informed that the title to the property had already been
transferred to the name of private respondents on the strength of the "Kasulatan ng Ganap na
Bilihan ng Lupa". Furthermore, it is averred by petitioner that when she attempted to redeem the
disputed property, the offer was refused. It is from this averred factual backdrop that petitoner
has instituted the present action claiming that the contract entered into by them was only an
equitable mortgage since the price of the disputed land was inadequate.
In their answer, private respondent vehemently insists that the "Kasulatan ng Ganap na
Bilihan ng Lupa" effectively transferred ownership of the disputed property to them for the said
contract was an absolute sale and not merely an equitable mortgage. To support their contention,
private respondents cites a provision in the contract which reads thus: “Na dahil at alang-alang sa
halagang ISANG DAAN AT LIMAMPUNG LIBONG PISO (P150,000.00), Salaping Pilipino, na ngayong
araw na ito ay ibinayad sa akin at tinanggap ko naman ng buong kasiyahang-loob bilang husto at
ganap na kabayaran ni RUBIN T. LEE, may sapat na gulang, Pilipino, kasal kay Lilian Sison at
naninirahan sa 230 MacArthur Highway, Karuhatan, Valenzuela, Metro Manila, aking IPINAGBIBILI,
ISINASALIN at INILILIPAT ng ganap at patuluyan at walang anumang pasusubali o pananagutan, ang
lahat at boo [sic] kong karapatan at pagmamay-ari at pamumusesyon sa nabanggit na lagay ng lupa

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at mga kaunlaran o mejoras na dito ay makikita o nakatirik o matatagpuan sa nasabing RUBIN T.

LEE at sa kanyang mga tagapamana o kahalili.”
After trial on the merits, the court a quo found for petitioner and ruled that the contract
was one of mortgage and not sale. On appeal, the above decision was reversed by the appellate
court.
ISSUE: Is the contract one of absolute sale?
HELD: YES. Art. 1602.The contract shall be presumed to be an equitable mortgage, in any of the
following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt or the performance of any
other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by
the vendee as rent or otherwise shall be considered as interest which shall be subject
to the usury laws.
It is well-settled that the presence of even one of the foregoing circumstances is sufficient
to declare a contract as an equitable mortgage, in consonance with the rule that the law favors
the least transmission of property rights. For the presumption of an equitable mortgage to arise
under Article 1602, two requisites must concur: (1) that the parties entered into a contract
denominated as a sale; and (2) that their intention was to secure an existing debt by way of a
mortgage.
After a careful review of the records of the case, we find no cogent reason to disturb the
ruling of the Court of Appeals.
Actori incumbit onus probandi. Upon the plaintiff in a civil case, the burden of proof never
parts. Plaintiff must therefore establish her case by a preponderance of evidence. She has the
burden of presenting evidence required to obtain a favorable judgment, and she, having the burden
of proof, will be defeated if no evidence were given on either side.
In this case, it was incumbent upon San Pedro to adduce sufficient evidence to support her
claim of an equitable mortgage. Petitioner relies on paragraphs 1, 2, 5 and 6 of Article 1602. Upon
an examination of the evidence, we find insufficient basis to conclude the existence of any of the
grounds she relied upon.
Anent alleged inadequacy of the purchase price, petitioner presented two witnesses who
testified as to the market values of real estate in the subject locale. Neither of these witnesses,
however, was able to conclusively demonstrate that the purchase price of the property was grossly
inadequate.
The testimony of the purported broker, Adela Ortega, was not given any credence by the
Court of Appeals. We quote with approval the ruling of the Court of Appeals on this point:
Plaintiff-appellee's witness Adela Ortega failed to substantiate her allegation that the prevailing
price of the subject property at the time of the sale (1985) was P60.00 per square meter. Although
Adela Ortega claimed that she was able to sell lots adjacent to the subject property at the said
prevailing price, she failed to present proof of such claim despite her reservation to do so.
Moreover, Adela Ortega's competency and credibility as an experienced real estate broker is also
suspect or questionable. She admitted that she was not aware or familiar with the factors or bases
that affect the increase in the value of realty, or how does it influence the zonal valuation made by
the local government, which should be very basic to a real estate broker.
The second witness, BIR Revenue Supervisor Juanito Angeles, testified as to the market
value of properties in the subject locale as of the effectivity of Department Order No. 83-94, on
September 25, 1994. However, it must be noted that Angeles did not testify as to the market value
of the locale as of May 23, 1985, the date of the contract in question. Neither did petitioner
present any other evidence of the real estate market values as of that date.
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Absent any evidence of the market value of the locale as of the date of the contract, it
cannot be concluded that the price at which the property was sold, or about P8.70 per square
meter, was grossly inadequate. Mere inadequacy of price would not be sufficient. The price must
be grossly inadequate, or purely shocking to the conscience. Since the property in question could
have been worth as little as P20.00 per square meter in 1994, the price of P8.70 per square meter
nine years earlier, in 1985, does not seem to be grossly inadequate. Indeed, respondents'
Declaration of Real Property No. 10786, for the year 1987, shows the market value of the property
to be only P34,470 for that year.
Delay in transfering title is not one of the instances enumerated by law which gives rise to the
presumption of equitable mortgage
LEONORA CEBALLOS vs. Intestate Estate of the Late EMIGDIO MERCADO

[G.R. No. 155856. May 28, 2004.]
PANGANIBAN
FACTS: Petitioner is the registered owner of a certain parcel of land situated in Bato, Badian,
Cebu, consisting of 53,301 square meters and covered by Transfer Certificate of Title No. T-948.
She was introduced to Emigdio Mercado for the purpose of obtaining a loan. Petitioner was able to
borrow the amount of P12,000.00 payable in two (2) months and to secure said loan, she executed
in favor of Emigdio Mercado a 'Deed of Real Estate Mortgage' over the subject property. The said
mortgage deed was not registered by the mortgagee. Petitioner was not able to pay her mortgage
indebtedness within the stipulated period.
Thereafter, a 'Deed of Absolute Sale' was executed and signed by petitioner and her
husband whereby the mortgaged property was sold to Emigdio Mercado for the price of P16,500.00.
It appears that petitioner offered to buy back the property from Emigdio Mercado for the price of
P30,000.00 but the latter's wife refused since the same was already transferred in their names by
virtue of the abovementioned Deed of Absolute Sale. As a consequence of which, petitioner filed
the instant case after Emigdio’s death against the latter’s estate. In his complaint, petitioner
maintains that the Contract should be declared as an equitable mortgage, because (1) the original
transaction was a loan; and, (2) for a titled property with an area of more than fifty-three thousand
square meters in a tourist area, the contract price of P16,500 was ridiculously low.
The trial court rendered judgment in favor of the respondents. On appeal, the CA affirmed
the decision of the court a quo on the ground that the transaction in instant case was not among
the transactions which the law (Art. 1602 NCC) regards as an equitable mortgage .
ISSUE: Was the CA correct in rejecting petitioner’s contention that the Deed of Absolute sale was
one of equitable mortgage?
HELD: YES. The instances when a contract — regardless of its nomenclature — may be presumed
to be an equitable mortgage are enumerated in the Civil Code as follows:
"Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate:
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt or the performance of any
other obligation.

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"In any of the foregoing cases, any money, fruits, or other benefit to be received by the
vendee as rent or otherwise shall be considered as interest which shall be subject to the
usury laws."
"Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be
an absolute sale."
In this case, both the trial and the appellate courts found none of the above-enumerated
circumstances. We find no cogent reason to reverse their factual finding.
Concededly, the original transaction was a loan. Petitioner failed to pay the loan;
consequently, the parties entered into another agreement — the assailed, duly notarized Deed of
Absolute Sale, which superseded the loan document. Petitioner had the burden of proving that she
did not intend to sell the property; that Emigdio Mercado did not intend to buy it; and that the new
agreement did not embody the true intention of the parties. We find no basis for disturbing the
CA's finding that she had failed to discharge this burden.
Harping on the alleged unconscionably low selling price of the subject land, petitioner
points out that it is located in a tourist area and golf haven in Cebu. Notably, she has failed to
prove that on February 13, 1982, the date of the sale, the area was already the tourist spot and
golf haven that she describes it to be. In 1990, the property might have been worth ten million
pesos, as she claimed; however, at the time of the sale, the area was still undeveloped. Hence,
her contention that the selling price was unconscionably low lacks sufficient substantiation.
Petitioner also argues that Mercado's delay in registering the Deed of Absolute Sale and
transferring the land title shows that the real agreement was an equitable mortgage.
An equitable mortgage is one that — although lacking in some formality, form or words, or
other requisites demanded by a statute — nevertheless reveals the intention of the parties to
charge a real property as security for a debt and contains nothing impossible or contrary to law.
Delay in transferring title is not one of the instances enumerated by law — instances in which an
equitable mortgage can be presumed. Moreover, throughout the testimony of petitioner before the
trial court, she never claimed that after the Deed of Absolute Sale had been executed in February
13, 1982, the land continued to be intended merely to secure payment of the P12,000 loan taken
on December 31, 1980.
CREDIT TRANSACTIONS: Equitable Mortgage; Gross Inadequacy of The Price; Loan; “Five Six”
Lending Trade
ROLANDO and ROSITA both surnamed CRUZ vs. COURT OF APPEALS

[G.R. No. 143388. October 6, 2003.]
BELLOSILLO
FACTS: Petitioner Spouses Cruz were the owners and operators of a dry goods stall in Divisoria.
They contracted a series of loans in varied amounts from Private Respondent spouses Capistrano,
who were in the business of lending money on a "five-six" basis. The Capistranos and the Cruzes
were close friends.
On 31 May 1985, petitioners obtained the first of these loans in the total amount of
P135,000. As conditions for the loan, the private respondents required Rosita Cruz to open a
checking account with PhilBanking, Las Piñas Extension Office, and thereafter asked her to sign a
blank check with the promise that the check would only be for safekeeping and would not be
deposited with the bank. To secure the loan, private respondents obliged petitioners to surrender
their TCT No. S-98034 covering lot together with the house standing thereon located in Las Piñas
City. Petitioner Rosita Cruz promptly complied with all the conditions imposed by private
respondents.
Subsequently, petitioners secured three (3) more loans from the Capistranos on various
dates in the amounts of P40,000, P15,000 and P5,000. Sometime in 1988, after all the sidewalk
stalls in Divisoria were demolished, the Capistranos were no longer able to collect from the vendors
who owed them. Petitioners later discovered that private respondents had mortgaged their
property in Las Piñas to San Miguel Corporation (SMC) to secure payment of a credit line.
Petitioners’ TCT No. S-98034 was already cancelled and TCT No. (98729) T-2156-A was issued in the

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name of private respondents by using a Deed of Absolute Sale purportedly executed in their favor
by petitioners.
Petitioners denied executing the Deed of Absolute Sale, tenaciously asserting that at the
time they were negotiating with private respondents concerning the loans, the latter required them
to sign on several blank sheets of paper with the understanding that private respondents would
superimpose a mortgage deed thereon, but it turned out that private respondents, instead of a
deed of mortgage, typed on those blank papers the deed of sale in question.
Private respondents, on the other hand, claimed that in November 1985 petitioners
intimated to them that they would not be able to pay the P195,000 debt upon its maturity in
December 1985 and, by way of offsetting the indebtedness, they delivered to respondents a duly
accomplished and notarized Deed of Absolute Sale.
Petitioners filed a complaint against private respondents and SMC with the RTC seeking the
annulment of the Deed of Absolute Sale, TCT No. 98729 issued in the name of private respondents,
and the deeds of mortgage executed by the Capistranos in favor of SMC.
The RTC ruled in favor of petitioners decreeing that: (a) The Deed of Absolute Sale in favor
of the Capistranos was null and void ab initio; (b) The TCT No. (98729) T-2156-A issued by the
Registry of Deeds of Las Piñas was ipso facto cancelled; (c) The Deeds of Mortgage executed by the
Capistranos over the subject property covered by TCT No. (98729T-2156-A) to secure a credit line
from SMC was null and void ab initio; (d) The Registrar of Deeds of Las Piñas issue a new title over
the subject property in favor of plaintiffs devoid of any annotation of defendant Capistranos'
mortgage to SMC. The CA reversed the decision of the lower court. Hence, this petition.
ISSUES:
1. Is the Deed of Absolute Sale, in reality, one of equitable mortgage?
2. Whether petitioners' loans to private respondents have already been paid
HELD: 1. YES. The applicable law may be found in the New Civil Code thus —
Art. 1602. The contract shall be presumed to be an equitable mortgage in any of the following
cases:
(1) When the price of the sale with right to repurchase is unusually inadequate;
x x x
Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be
an absolute sale.
Vendors covered by Art. 1602 usually find themselves in an unequal position when
bargaining with the vendees, and will readily sign onerous contracts to get the money they need.
This is precisely the evil that Art. 1602 seeks to guard against. The evident intent of the provision is
to give the supposed vendor maximum safeguards for the protection of his legal rights under the
true agreement of the parties. Article 1602, par. (1), accords significance to the gross inadequacy
of the price of a purported sale to such an extent as to create the presumption that the transaction
is an equitable mortgage.
In the instant case, petitioners acquired the house and lot subject of the deed of sale for
P78,000 in 1975. The house was remodeled into a two-storey residence in 1982 at the cost of
P280,000. From these figures, petitioners spent a total of P358,000 in acquiring the property and
introducing improvements thereon. Yet, the property was purportedly sold to private respondents
in 1985 for a measly P66,000, or barely 19% of its total acquisition and improvement cost three
years before, in 1982. Certainly, no seller in his right senses would agree to part with his valuable
property for such an unusually inadequate consideration.
The rule is well-settled that a contract appearing on its face to be a definite sale, like the
contract in question, may be interpreted as an equitable mortgage if any of the circumstances in
Art. 1602 of the New Civil Code, such as the gross inadequacy of the price, is present.
The other factor to consider is the continuous and unmolested physical possession of the
contested property by petitioners for almost three years, from the time of the alleged sale of the
property in 1985 to the filing by petitioners of the case for annulment of the deed of sale in 1988.
Although symbolically, the Deed of Absolute Sale transferred possession of the property to
respondent Capistranos, it was petitioners, the supposed vendors, who remained in physical
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possession of the property. In fact, it does not even appear from the records that the Capistranos
ever declared the property in their names for taxation purposes or paid taxes thereon since the
execution of the document.
Verily, had the intention of the parties been a contract of sale and not merely a contract of
mortgage, private respondents could have asserted their right to possess the property, and would
not have allowed petitioners to freely stay thereon for such a long period of almost three (3) years.
Private respondents' decision to eject petitioners from the property came only after the institution
of this case by petitioners. Apart from the foregoing, respondent Cecilia Capistrano's admission
during the trial that the title to the property was delivered to her by petitioners only to secure
payment of the loans is a crucial circumstance that reinforces the conclusion that the contract is
not really a sale but an equitable mortgage.
2. NO. Petitioners only made payments of what were due but did not fully settle the debt.
Private respondents have a valid and subsisting credit, not in the entire amount of the loans but
only to the extent as will be discussed shortly hereafter.
The judgment declaring the contract to be an equitable mortgage should not be construed
as a bar to the collection of the unpaid loans. Private respondents have the perfect right to
foreclose the mortgage and sell the property subject thereof to satisfy the mortgage debt.
Petitioner Rolando and Rosita Cruz are ordered to pay private respondent spouses Miguel
and Cecilia Capistrano the unpaid balance of the loans in the total amount of P66,000.00 with legal
interest within ten (10) months from the finality of this Decision; otherwise, the mortgaged
property shall be sold at public auction to cover payment of the mortgage debt and the costs of
suit.
Nonpayment of the full consideration will not invalidate the sale; Remedy of unpaid seller is to
sue for collection
DESAMPARADOS SOLIVA vs. INTESTATE ESTATE OF MARCELINO VILLABA

[GR No. 154017. DECEMBER 8, 2003.]
PANGANIBAN
FACTS: Petitioner Desamparados Soliva is the owner of a parcel of agricultural land located at
Hinaplanan, Claveria, Misamis Oriental. On January 4, 1966, Capt. Marcelo Villaba asked Soliva’s
permission to occupy her house on the said land, promised to buy the house and lot upon receipt of
his money from Manila. Capt. Villaba paid P600.00 to petitioner for the occupation of the house.
When Capt. Villaba died in 1978, his wife, Valenta Villaba took possession of the property,
destroyed the house thereon and built a new one. It is further alleged by petitioner that at the
time of Capt. Villaba’s death, he has not paid the consideration for the house and lot. Despite
repeated demands, Valenta Villaba refused to vacate the said property.
As a consequence of which, petitioner filed on May 5, 1982 a complaint for recovery of
ownership, possession and damages against Valenta Villaba. On March 26, 1984, the court a quo
rendered judgment restoring to petitioner her right of ownership and possession of the property.
Respondent Valenta filed a petition for relief from judgment after she came to know that
her late husband had already paid the amount of P2,250 out of the purchase price of P3,500 for the
house and lot and that petitioner’s claim of ownership has already prescribed. The same was
however denied by the court a quo. The Court of Appeals reversed the above decision and ordered
the court a quo to continue with the proceeding after petitioner has amended her complaint.
On March 11, 1993, the court a quo rendered a decision dismissing petitioners complaint
and ordered the reconveyance of the property to respondent. The said decision was affirmed by
the Court of Appeals.
In the present petition for review, petitioner argues that the oral contract of sale was
invalid because respondents failed to comply with their obligation to pay in full the purchase price
of the house and lot. She further contests the appellate court’s finding that she slept on her rights,
arguing that she undertook extrajudicial measures to collect the unpaid balance of the purchase
price.

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ISSUES:
1. Did respondent’s failure to pay in full the purchase price of the house and lot rendered
the contract invalid?
2. Is petitioner’s claim already barred by laches?
HELD: 1. NO. Contrary to petitioner's submission, the nonpayment of the full consideration did
not invalidate the contract of sale. Under settled doctrine, nonpayment is a resolutory condition
that extinguishes the transaction existing for a time and discharges the obligations created
thereunder. The remedy of the unpaid seller is to sue for collection or, in case of a substantial
breach, to rescind the contract. These alternative remedies of specific performance and rescission
are provided under Article 1191 of the Civil Code as follows:
"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
"The injured party may choose between fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible.
"The Court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
"xxx xxx xxx."
The rescission of a sale of immovables, on the other hand, is governed by Article 1592 of
the Civil Code as follows:
"Article 1592. In the sale of immovable property, even though it may have been stipulated
that upon failure to pay the price at the time agreed upon the rescission of the contract shall of
right take place, the vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either judicially or extrajudicially or
by a notarial act. After the demand, the court may not grant him a new term."
Upon the facts found by the trial and the appellate courts, petitioner did not exercise her
right either to seek specific performance or to rescind the verbal contract of sale until May 1982,
when she filed her complaint for recovery of ownership and possession of the property.
2. YES. In general, laches is the failure or neglect, for an unreasonable and unexplained
length of time, to do that which — by the exercise of due diligence — could or should have been
done earlier. 19 It is the negligence or omission to assert a right within a reasonable period,
warranting the presumption that the party entitled to assert it has either abandoned or declined to
assert it.
Under this time-honored doctrine, relief has been denied to litigants who, by sleeping on
their rights for an unreasonable length of time — either by negligence, folly or inattention — have
allowed their claims to become stale. Vigilantibus, sed non dormientibus, jura subveniunt. The
laws aid the vigilant, not those who slumber on their rights.
The following are the essential elements of laches:
(1) Conduct on the part of the defendant that gave rise to the situation complained of; or the
conduct of another which the defendant claims gave rise to the same;
(2) Delay by the complainant in asserting his right after he has had knowledge of the
defendant's conduct and after he has had an opportunity to sue;
(3) Lack of knowledge by or notice to the defendant that the complainant will assert the right
on which he bases his suit; and
(4) Injury or prejudice to the defendant in the event relief is accorded to the complainant.
Petitioner complied with her obligation to deliver the property in 1966. However,
respondent's husband failed to comply with his reciprocal obligation to pay, when the money he
had been expecting from Manila never materialized. He also failed to make further installments
after May 13, 1966. As early as 1966, therefore, petitioner already had the right to compel
payment or to ask for rescission, pursuant to Article 1169 of the Civil Code, which reads:
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
"However, the demand by the creditor shall not be necessary in order that delay may exist:
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xxx xxx xxx

"In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins."
Nonetheless, petitioner failed to sue for collection or rescission. Due to insufficiency of
evidence, the lower courts brushed aside her assertions that she had availed herself of extrajudicial
remedies to collect the balance or to serve an extrajudicial demand on Villalba, prior to her legal
action in 1982. Meanwhile, respondent had spent a considerable sum in renovating the house and
introducing improvements on the premises.
In view thereof, the appellate court aptly ruled that petitioner's claim was already barred
by laches. It has been consistently held that laches does not concern itself with the character of
the defendant's title, but only with the issue of whether or not the plaintiff — by reason of long
inaction or inexcusable neglect — should be barred entirely from asserting the claim, because to
allow such action would be inequitable and unjust to the defendant.
Likewise, it must be stressed that unlike prescription, laches is not concerned merely with
the fact of delay, but even more with the effect of unreasonable delay.
Remedies Of Unpaid Seller
FIDELA CASTILLO Vda. DE MISTICA vs SPOUSES BERNARDINO and MARIA GERONA-NAGUIAT

[GR No. 137909. DECEMBER 11, 2003.]
PANGANIBAN
FACTS: Eulalio Mistica, predecessor-in-interest of herein petitioner, is the owner of a parcel of land
located at Malhacan, Meycauayan, Bulacan. On April 5, 1979, Eulalio entered into a contract to sell
with Bernardo over a portion of the aforementioned lot containing an area of 200 square meters.
In the contract (denominated as KASULATAN), the parties agreed that Eulalio will sell the said
portion of land for a total consideration of P20,000.00 subject to the condition that Bernardino will
make a partial payment of P2,000.00 and the remaining balance will be paid within a period of ten
years. After complying with the stipulation regarding the partial payment, respondent again made
another partial payment of P1,000.00. However, it appears that the same was respondent’s last
payment as he never made another payment after that.
As a consequence of which, petitioner filed a complaint for rescission alleging that the
failure and refusal of respondents to pay the balance of the purchase price constitutes a violation
of the contract and entitles her to rescind the same. Petitioner therefore prayed that respondents,
being in possession of the subject property, be ordered to vacate and surrender the possession of
the same to her.
In their answer, respondents maintain that they committed no breach or violation of the
contract, alleging that during the wake of petitioner’s husband, they offered to pay the remaining
balance to petitioner but the latter refused without just cause.
The court a quo rendered a decision dismissing the complaint. The above decision was
affirmed by the appellate court which held that respondents did not breach the contract of sale.
ISSUE: Is petitioner entitled to rescind the contract of sale for failure of respondents to pay the
purchase price?
HELD: NO. The transaction between Eulalio Mistica and respondents, as evidenced by the
Kasulatan, was clearly a Contract of Sale. A deed of sale is considered absolute in nature when
there is neither a stipulation in the deed that title to the property sold is reserved to the seller
until the full payment of the price; nor a stipulation giving the vendor the right to unilaterally
resolve the contract the moment the buyer fails to pay within a fixed period.
In a contract of sale, the remedy of an unpaid seller is either specific performance or
rescission. Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on
the violation of the reciprocity between parties, brought about by a breach of faith by one of them.
Rescission, however, is allowed only where the breach is substantial and fundamental to the
fulfillment of the obligation.
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In the present case, the failure of respondents to pay the balance of the purchase price
within ten years from the execution of the Deed did not amount to a substantial breach. In the
Kasulatan, it was stipulated that payment could be made even after ten years from the execution
of the Contract, provided the vendee paid percent interest. The stipulations of the contract
constitute the law between the parties; thus, courts have no alternative but to enforce them as
agreed upon and written.
Moreover, it is undisputed that during the ten-year period, petitioner and her deceased
husband never made any demand for the balance of the purchase price. Petitioner even refused the
payment tendered by respondents during her husband's funeral, thus showing that she was not
exactly blameless for the lapse of the ten-year period. Had she accepted the tender, payment
would have been made well within the agreed period.
If petitioner would like to impress upon this Court that the parties intended otherwise, she
has to show competent proof to support her contention. Instead, she argues that the period cannot
be extended beyond ten years, because to do so would convert the buyer's obligation to a purely
potestative obligation that would annul the contract under Article 1182 of the Civil Code.
This contention is likewise untenable. The Code prohibits purely potestative, suspensive,
conditional obligations that depend on the whims of the debtor, because such obligations are
usually not meant to be fulfilled. Indeed, to allow the fulfillment of conditions to depend
exclusively on the debtor's will would be to sanction illusory obligations. The Kasulatan does not
allow such thing. First, nowhere is it stated in the Deed that payment of the purchase price is
dependent upon whether respondents want to pay it or not. Second, the fact that they already
made partial payment thereof only shows that the parties intended to be bound by the Kasulatan.
Consignation is sufficient to defeat seller’s right to demand rescission of the deed of absolute
sale
PERLA PALMA GIL, ET. AL. vs. COURT OF APPEALS

[G.R. No. 127206. September 12, 2003.]
CALLEJO, SR
FACTS: Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were co-
owners of a parcel of land identified as Lot No. 59-C. In 1953, Concepcion filed a complaint against
her sister for specific performance, to compel the defendant to cede and deliver to her an
undivided portion of the said property. The court rendered judgment in favor of Concepcion. The
decision became final and executory. On motion of Concepcion, the court issued a writ of
execution. Nieves, however, refused to execute the requisite deed in favor of her sister. So, the
sheriff had the property subdivided into four lots. In 1956, Concepcion executed a deed of absolute
sale over Lot 59-C-1 in favor of Iluminada Pacetes. Concepcion filed a complaint for unlawful
detainer against the spouses Angel and Nieves Villarica. The court rendered judgment in favor of
plaintiff. The decision became final and executory but the plaintiff did not file any motion for a
writ of execution.
The Register of Deeds issued TCT No. 7450 over Lot 59-C-1 and 59-C-2 in the name of
Concepcion. However, the latter failed to transfer title to the property to and under the name of
Iluminada Pacetes. The latter did not remit the balance of the purchase price of the property to
Concepcion. In 1959, Concepcion died intestate and was survived by Nieves Villarica and her
nephews and nieces. Iluminada filed a motion for her substitution as party-plaintiff in lieu of the
deceased Concepcion. In the meantime Iluminada consigned with the court the amount of
P11,983.00 as payment of the purchase price of the property. As successor-in-interest of
Concepcion, she likewise filed a motion for execution for the eviction of the defendant Nieves
Villarica and all those acting for and in her behalf.
ISSUE: May petitioners validly demand for the rescission of the absolute deed of sale?

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HELD: NO. In a perfected contract of sale of realty, the right to rescind the said contract depends
upon the fulfillment or non-fulfillment of the prescribed condition. The condition pertains in reality
to the compliance by one party of an undertaking the fulfillment of which would give rise to the
demandability of the reciprocal obligation pertaining to the other party. The reciprocal obligation
envisaged would normally be, in the case of the vendee, the payment by the vendee of the agreed
purchase price and in the case of the vendor, the fulfillment of certain express warranties.
Non-payment of the purchase price of property constitutes a very good reason to rescind a
sale for it violates the very essence of the contract of sale. Non-payment of the purchase price of
property is a resolutory condition for which the remedy is either rescission or specific performance
under Article 1191 of the New Civil Code. This is true for reciprocal obligations where the
obligation is a resolutory condition of the other. The vendee is entitled to retain the purchase price
or a part of the purchase price of realty if the vendor fails to perform any essential obligation of
the contract. Such right is premised on the general principles of reciprocal obligations.
The petitioners, as successors-in-interest of the vendor, are not the injured parties entitled
to a rescission of the deed of absolute sale. It was Concepcion's heirs, including the petitioners,
who were obliged to deliver to the vendee a certificate of title over the property under the latter's
name but had failed to comply with the obligation. The consignation by the vendee of the
purchase price of the property is sufficient to defeat the right of the petitioners to demand for a
rescission of the said deed of absolute sale.
The execution of a public instrument gives rise only to a prima facie presumption of delivery
TEN FORTY REALTY AND DEVELOPMENT CORP. vs. MARINA CRUZ

[G.R. No. 151212. September 10, 2003.]
PANGANIBAN
FACTS: Petitioner Ten Forty Realty Development Corp. purchased from Barbara Galino the disputed
parcel of land lacated at #71, 18th Street, E.B.B., Olongapo City on December 5, 1996. It is alleged
by petitioner that Barbara Galino sold the same property to respondent Marina Cruz on April 24,
1998 and that she immediately took possession of the said property. Petitioner maintains that
Marina’s occupation of the disputed property was merely tolerated by it.
On April 29, 1999, petitioner sent a demand letter to respondent to vacate the property
and pay reasonable amount for the use and occupation of the same. However, the said demand fell
on deaf ears prompting the former to file and ejectment case against the latter.
In her answer, respondent alleged that petitioner never made any allegation that it had
been in prior possession of the disputed land and that the same was lost through force, stealth or
violence. On the contrary, evidence showed that it was Barbara Galino who was in possession at
the time of the sale and vacated the property in favor of respondent; and never was there an
occasion when petitioner occupied a portion of the premises before respondent occupied the lot in
April 1988.
After trial on the merits, the Municipal Trial Court in Cities (MTCC) found for petitioner and
ordered respondent to vacate the property. On appeal, the RTC reversed the decision of the MTCC.
In sustaining the RTC, the Court of Appeals held that respondent’s possession or occupation of the
disputed property was in the nature of an exercise of ownership which should have put petitioner
on guard. The appellate court found it unbelievable that petitioner, which claims to be the owner
of the disputed property, would tolerate possession of the property by respondent from April 24,
1998 up to October 16, 1998
ISSUE: Was the ownership of the property transferred to petitioner despite the lack of delivery?
HELD: NO. In a contract of sale, the buyer acquires the thing sold only upon its delivery "in any of
the ways specified in Articles 1497 to 1501, or any other manner signifying an agreement that the
possession is transferred from the vendor to the vendee." With respect to incorporeal property,
Article 1498 lays down the general rule: the execution of a public instrument shall be equivalent to
the delivery of the thing that is the object of the contract if, from the deed, the contrary does not
appear or cannot be clearly inferred.
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However, ownership is transferred not by contract but by tradition or delivery. Nowhere in

the Civil Code is it provided that the execution of a Deed of Sale is a conclusive presumption of
delivery of possession of a piece of real estate.
This Court has held that the execution of a public instrument gives rises only to a prima
facie presumption of delivery. Such presumption is destroyed when the delivery is not effected
because of a legal impediment. Pasagui v. Villablanca had earlier ruled that such constructive or
symbolic delivery, being merely presumptive, was deemed negated by the failure of the vendee to
take actual possession of the land sold.
The ownership of immovable property sold to two different buyers at different times is
governed by Article 1544 of the Civil Code, which reads as follows:
"Article 1544. . . .
"Should it be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in the Registry of Property.
"Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in possession; and, in the absence thereof, to the person who presents the oldest title,
provided there is good faith."
Galino allegedly sold the property in question to petitioner on December 5, 1996 and,
subsequently, to respondent on April 24, 1998. Petitioner thus argues that being the first buyer, it
has a better right to own the realty. However, it has not been able to establish that its Deed of
Sale was recorded in the Registry of Deeds of Olongapo City. Its claim of an unattested and
unverified notation on its Deed of Absolute Sale is not equivalent to registration. It admits that,
indeed, the sale has not been recorded in the Registry of Deeds.
In the absence of the required inscription, the law gives preferential right to the buyer who
in good faith is first in possession. In determining the question of who is first in possession, certain
basic parameters have been established by jurisprudence.
First, the possession mentioned in Article 1544 includes not only material but also symbolic
possession. Second, possessors in good faith are those who are not aware of any flaw in their title
or mode of acquisition. Third, buyers of real property that is in the possession of persons other
than the seller must be wary — they must investigate the rights of the possessors. Fourth, good
faith is always presumed; upon those who allege bad faith on the part of the possessors rests the
burden of proof.
Earlier, we ruled that the subject property had not been delivered to petitioner; hence, it
did not acquire possession either materially or symbolically. As between the two buyers, therefore,
respondent was first in actual possession of the property.
Petitioner has not proven that respondent was aware that her mode of acquiring the
property was defective at the time she acquired it from Galino. At the time, the property — which
was public land — had not been registered in the name of Galino; thus, respondent relied on the
tax declarations thereon. As shown, the former's name appeared on the tax declarations for the
property until its sale to the latter in 1998. Galino was in fact occupying the realty when
respondent took over possession. Thus, there was no circumstance that could have placed the
latter upon inquiry or required her to further investigate petitioner's right of ownership.
Assignment of Credit; Nature; Effect; Warranties
SONNY LO vs. COURT OF APPEALS

[GR. No. 149420. OCTOBER 8, 2003.]
YNARES-SANTIAGO
FACTS: Petitioner Sonny Lo is a building contractor, doing business under the name and style of
San’s Enterprises, while herein private respondent KJS ECO-FORMWORK System Phil., Inc. is a
corporation engaged in the sale of steel scaffoldings. On February 22, 1990, petitioner obtained
from herein respondent scaffolding equipments worth P540,425.80 to be used in constructing a
residential house owned by Jomero Realty Inc. Petitioner was not able to settle his obligation to
respondent despite the repeated demands made against him.
(Sales and Lease),
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Incidentally, petitioner and respondent executed on October 11, 1990 a Deed of Assignment
whereby the former assigned to the latter his receivables from Jomero Realty amounting to
P335,462.14. One of the stipulations agreed upon by the parties was that that “the ASSIGNOR has
not done and will not cause anything to be done to diminish or discharge the said debt, or delay or
to prevent the ASSIGNEE, it successors or assigns, from collecting the same”.
However, when respondent tried to collect the said credit from Jomero Realty, the latter
refused to honor the Deed of Assignment on the ground that petitioner was also indebted to it.
Respondent then went after petitioner Lo to collect his outstanding indebtedness but the latter
refused to pay the same claiming that his obligation had been extinguished when they executed the
Deed of Assignment.
After trial on the merits, the court a quo rendered a decision dismissing respondent’s
complaint on the ground that the assignment of credit extinguished petitioner’s obligation. On
appeal, the CA reversed the above decision on the following grounds: first, petitioner failed to
comply with his warranty under the deed; second, the object of the deed did not exist at the time
of the transaction; and third, petitioner violated the terms of the agreement.
ISSUE: Was petitioner’s obligation was extinguished due to the execution of the Deed of
Assignment?
HELD: NO. An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another, known as
the assignee, who acquires the power to enforce it to the same extent as the assignor could
enforce it against the debtor.
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers
another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. In
order that there be a valid dation in payment, the following are the requisites: (1) There must be
the performance of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person; (2) There must be
some difference between the prestation due and that which is given in substitution (aliud pro alio);
(3) There must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that due.
The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against the debtor's
debt. As such, the vendor in good faith shall be responsible, for the existence and legality of the
credit at the time of the sale but not for the solvency of the debtor, in specified circumstances.
Hence, it may well be that the assignment of credit, which is in the nature of a sale of
personal property, produced the effects of a dation in payment which may extinguish the
obligation. However, as in any other contract of sale, the vendor or assignor is bound by certain
warranties. More specifically, the first paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the credit at
the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the
debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and
of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the
existence and legality of the credit at the time of the sale or assignment. When Jomero claimed
that it was no longer indebted to petitioner since the latter also had an unpaid obligation to it, it
essentially meant that its obligation to petitioner has been extinguished by compensation. In other
words, respondent alleged the non-existence of the credit and asserted its claim to petitioner's
warranty under the assignment. Therefore, it behooved on petitioner to make good its warranty
and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of
Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such further acts
and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever
collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents.
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Indeed, by warranting the existence of the credit, petitioner should be deemed to have
ensured the performance thereof in case the same is later found to be inexistent. He should be
held liable to pay to respondent the amount of his indebtedness.
Concept Of Buyer In Good Faith

LTD: Exception to the Rule that purchaser need not go beyond the certificate of title
HEIRS OF AMADO CELESTIAL vs HEIRS OF EDITHA CELESTIAL

[GR No. 142691, August 5, 2003.]
YNARES-SANTIAGO
FACTS: The disputed parcel of land covering 466sq. meters and located at Dadiangas, General
Santos City was originally owned by Amado Celestial. The same was acquired by Amado Celestial
by virtue of a Miscellaneous Sales Patent issued in his name. It appears, however, that at the time
of the issuance of the OCT on May 25, 1966, Amado’s civil status was designated as “single” on the
said title despite the fact that Amado has already been married to herein petitioner Florencia for
almost four years.
It is alleged that on October 10, 1975 Amado executed a Deed of Absolute Sale covering the
disputed property in favor of Editha. The abovementioned document however did not bear the
signature of petitioner and still described Amado as “single” when in fact he was already married
to petitioner for 13 years at the time of its execution. Amado subsequently died on March 21,
1976.
On the strength of the Deed of Absolute Sale allegedly executed by Amado, Editha caused
the disputed property to be subdivided into three lots. She also had the OCT cancelled and caused
the issuance of three TCTs covering the trhee subdivided lots. Thereafter, Editha sold the lots to
Prima Chua on September 4, 1978 who was issued the corresponding TCTs in her name.
On February 15, 1990, respondent Chua, notified herein petitioners who were still
occupying the disputed land to vacate the same. In response to respondent Chua’s demand, herein
petitioners filed with the proper court a complaint for judicial declaration of the nullity of the
Deed of Sale axecuted by Amado and likewise all the Deeds of Sale executed by Editha in favor of
Chua. It is alleged by petitioners that respondent Chua was not a buyer in good faith because at
the time of the execution of the sale, Chua knew that an old wooden house and a semi-bungalow
house were already erected in the disputed property. Editha was substituted by her heirs after her
death on April 27, 1994. Respondent heirs maintains that their predecessors in interest were
buyers in good faith as they were not required to go beyond the certificate of title.
After trial on the merits, the court a quo rendered a decision in favor of petitioners after it
ruled that the Deed of Sale executed by Amado and, thereafter, by Editha were null and void for
being forged and simulated reapectively. On appeal, the appellate court reversed the above
decision.
ISSUE: Was Chua a buyer in good faith?
HELD: NO. We answer in the negative. The trial court correctly found that respondent Chua had
knowledge or, at the very least, notice that some other person had a right to or interest on the
property in question prior to her purchase from Editha.
For a buyer to be deemed a purchaser in good Faith, the ruling in Heirs of Severa P.
Gregorio v. Court of Appeals is instructive:
A purchaser in good faith is one who buys the property of another without notice that some
other person has a right to or interest in such property and pays a full and fair price at the time of
purchase or before he has notice of the claim or interest of some other person in the property. As
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good faith primarily refers to a state of mind and is always a question of intention, evidence as to
conduct and outward acts are usually resorted to in order to arrive at a reasonable determination
of the inward motive or intention.
The records show that respondent Chua knew for a fact that prior to 1962 and prior to the
sale, there were erected on the land in question an old wooden house and a semi-bungalow house
which were occupied by the father of Amado Celestial, Erlindo Celestial and their other relatives.
Carmencita Paradena, a witness for the petitioners, admitted residing with Amado and Florencia as
their tenant on the land in question since 1963. She also testified that the brothers and sisters of
Amado resided with them in the old wooden house. This contradicts what respondent Chua's claim
that prior to the sale, only spouses Editha and Erlindo Celestial occupied the land in question and
nobody else. These facts alone should have put respondent Chua on guard that there were possible
defects in the title of the vendor. As enumerated in Mathay v. Court of Appeals, viz:
Although it is a recognized principle that a person dealing on a registered land need not go
beyond its certificate of title, it is also a firmly settled rule that where there are circumstances
which would put a party on guard and prompt him to investigate or inspect the property being sold
to him, such as the presence of occupants/tenants thereon, it is of course, expected from the
purchaser of a valued piece of land to inquire first into the status or nature of possession of the
occupants, i.e., whether or not the occupants possess the land en concepto de dueño, in concept
of owner. As is the common practice in the real estate industry, an ocular inspection of the
premises involved is a safeguard a cautious and prudent purchaser usually takes. Should he find out
that the land he intends to buy is occupied by anybody else other than the seller . . ., it would then
be incumbent upon the purchaser to verify the extent of the occupant's possessory rights. The
failure of a prospective buyer to take such precautionary steps would mean negligence on his part
and would thereby preclude him from claiming or invoking the rights of a 'purchaser in good faith'.
In the case at bar, respondent Chua failed to make the necessary inquiry as to the
possessory rights of the relatives of Editha and Erlindo Celestial. The records show that respondent
Chua failed to inquire on the respective rights of petitioner Florencia and Carmencita Paradena,
who were in actual possession of the land in question, or of the other brothers and sisters of Erlindo
Celestial, husband of Editha, who also resided on the questioned land. No amount of good faith
can therefore be appreciated in favor of respondent Chua's acquisition of the land in question.
Double Sale; Purchaser in Good Faith

LTD: Registration of Land
SPOUSES NOEL and JULIE ABRIGO vs. ROMANA DE VERA

[G.R. No. 154409. June 21, 2004.]
PANGANIBAN
FACTS: On May 27, 1993, Gloria Villafania sold a house and lot, covered only by a Tax Declaration
in favor of Rosendo Tigno-Salazar and Rosita Cave-Go, which the vendees registered under Act No.
3344, as amended. Later on, the vendees filed suit against Villafania for annulment of documents
of sale. The trial court rendered a decision giving Villafania one year within which to purchase the
subject property. Failure to do so would hold the previous sale valid and binding and Villafania shall
voluntarily leave the premises without any need of demand. Villafania was unable to purchase back
the property within the stipulated period, hence the vendees declared the lot to be in their name.
Unknown to the vendees however, before the expiration of the prescribed period for
repurchase, Villafania obtained a free patent over the property in 1988, which was later cancelled
by a Torrens title subsequently obtained in 1996, also in her own name. In October 1997, Salazar
and Go sold the property to herein petitioners, spouses Noel and Julie Abrigo. Nearly a week after
the sale, Villafania also sold the same property to respondent, Romana de Vera, who registered the
sale in her name. As a consequence of such registration, a Torrens title was later on issued in her
own name.
In November 1997, respondent filed a case of forcible entry and damages against the
petitioners but was subsequently dismissed in lieu of the agreement of the parties that neither can
take possession of the property until the instant case is terminated. On November 21, 1997
however, petitioners filed a case for annulment of documents injunction, preliminary injunction,
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restraining order and damages against respondent and Gloria Villafania. The trial court initially
ruled in favor of the petitioners, but on appeal, upon reconsideration of the decision, the appellate
court held that respondent De Vera was a purchaser in good faith, having relied upon the Torrens
title of her vendor, Villafania, hence she was more entitled to the property. Hence the present
petition for review.
ISSUES: 1. Is respondent’s registration under the Torrens system superior to that of petitioners’
registration under Act No. 3344, as amended?
2. Is respondent a purchaser in good faith?
HELD: 1. YES. Article 1544 of the Civil Code states the law on double sale thus:
“Art. 1544. If the same thing should have been sold to different vendees, the ownership
shall be transferred to the person who may have first taken possession thereof in good faith, if it
should be movable property.
“Should it be immovable property, the ownership shall belong to the person acquiring it
who in good faith first recorded it in the Registry of Property.
“Should there be no inscription, the ownership shall pertain to the person who in good faith
was first in the possession; and, in the absence thereof, to the person who presents the oldest
title, provided there is good faith.”
Otherwise stated, the law provides that a double sale of immovables transfers ownership to
(1) the first registrant in good faith; (2) then, the first possessor in good faith; and (3) finally, the
buyer who in good faith presents the oldest title. There is no ambiguity in the application of this
law with respect to lands registered under the Torrens system.
This principle is in full accord with Section 51 of PD 1529 which provides that no deed,
mortgage, lease or other voluntary instrument — except a will — purporting to convey or affect
registered land shall take effect as a conveyance or bind the land until its registration.Thus, if the
sale is not registered, it is binding only between the seller and the buyer but it does not affect
innocent third persons.
In the instant case, both Petitioners Abrigo and respondent registered the sale of the
property. Since neither petitioners nor their predecessors (Tigno-Salazar and Cave-Go) knew that
the property was covered by the Torrens system, they registered their respective sales under Act
3344.For her part, respondent registered the transaction under the Torrens system 18 because,
during the sale, Villafania had presented the transfer certificate of title (TCT) covering the
property.
Respondent De Vera contends that her registration under the Torrens system should prevail
over that of petitioners who recorded theirs under Act 3344. De Vera relies on the following insight
of Justice Edgardo L. Paras:
“. . . If the land is registered under the Land Registration Act (and has therefore a Torrens Title),
and it is sold but the subsequent sale is registered not under the Land Registration Act but under
Act 3344, as amended, such sale is not considered REGISTERED, as the term is used under Art.
1544 . . .”
We agree with respondent. It is undisputed that Villafania had been issued a free patent
registered as Original Certificate of Title (OCT) No. P-30522. The OCT was later cancelled by
Transfer Certificate of Title (TCT) No. 212598, also in Villafania’s name. 22 As a consequence of the
sale, TCT No. 212598 was subsequently cancelled and TCT No. 22515 thereafter issued to
respondent.
More recently, in Naawan Community Rural Bank v. Court of Appeals, the Court upheld the
right of a party who had registered the sale of land under the Property Registration Decree, as
opposed to another who had registered a deed of final conveyance under Act 3344. In that case,
the “priority in time” principle was not applied, because the land was already covered by the
Torrens system at the time the conveyance was registered under Act 3344. For the same reason,
inasmuch as the registration of the sale to Respondent De Vera under the Torrens system was done
in good faith, this sale must be upheld over the sale registered under Act 3344 to Petitioner-
Spouses Abrigo.

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Radiowealth Finance Co. v. Palileo explained the difference in the rules of registration
under Act 3344 and those under the Torrens system in this wise:
“Under Act No. 3344, registration of instruments affecting unregistered lands is ‘without
prejudice to a third party with a better right.’ The aforequoted phrase has been held by this Court
to mean that the mere registration of a sale in one’s favor does not give him any right over the land
if the vendor was not anymore the owner of the land having previously sold the same to somebody
else even if the earlier sale was unrecorded.
2. YES. We have consistently held that Article 1544 requires the second buyer to acquire
the immovable in good faith and to register it in good faith. Mere registration of title is not enough;
good faith must concur with the registration. Equally important, under Section 44 of PD 1529, every
registered owner receiving a certificate of title pursuant to a decree of registration, and every
subsequent purchaser of registered land taking such certificate for value and in good faith shall
hold the same free from all encumbrances, except those noted and enumerated in the certificate.
Thus, a person dealing with registered land is not required to go behind the registry to determine
the condition of the property, since such condition is noted on the face of the register or
certificate of title. T
The Court of Appeals examined the facts to determine whether respondent was an innocent
purchaser for value. After its factual findings revealed that Respondent De Vera was in good faith,
it explained thus:
“. . . Gloria Villafania, [Respondent] De Vera’s vendor, appears to be the registered owner. The
subject land was, and still is, registered in the name of Gloria Villafania. There is nothing in her
certificate of title and in the circumstances of the transaction or sale which warrant [Respondent]
De Vera in supposing that she need[ed] to look beyond the title. She had no notice of the earlier
sale of the land to [petitioners]. She ascertained and verified that her vendor was the sole owner
and in possession of the subject property by examining her vendor’s title in the Registry of Deeds
and actually going to the premises. There is no evidence in the record showing that when she
bought the land on October 23, 1997, she knew or had the slightest notice that the same was under
litigation in Civil Case No. D-10638 of the Regional Trial Court of Dagupan City, Branch 40, between
Gloria Villafania and [Petitioners] Abrigo. She was not even a party to said case. In sum, she
testified clearly and positively, without any contrary evidence presented by the [petitioners], that
she did not know anything about the earlier sale and claim of the spouses Abrigo, until after she
had bought the same, and only then when she bought the same, and only then when she brought an
ejectment case with the . . . Municipal Court of Mangaldan, known as Civil Case No. 1452. To the
[Respondent] De Vera, the only legal truth upon which she had to rely was that the land is
registered in the name of Gloria Villafania, her vendor, and that her title under the law, is absolute
and indefeasible. . . .”
We find no reason to disturb these findings, which petitioners have not rebutted.
In double sale, good faith is essential to any claim of ownership

LTD: Purchaser not required to inspect the title to a registered land; Exception
SPS. TOMAS and SILVINA OCCEÑA vs. LYDIA MORALES OBSIANA ESPONILLA, ET AL.
[G.R. No. 156973, June 4, 2004.]
PUNO
FACTS: The case at bar involves a portion of the 1,198-square meter residential lot situated in
Sibalom, Antique, originally owned by spouses Tordesillas. They had three (3) children, namely:
Harod, Angela and Rosario, the latter having been survived by her two (2) children, Arnold and Lilia
de la Flor.
After the death of the Tordesillas spouses, the lot was inherited by their children and
grandchildren. In 1951, the heirs executed a Deed of Pacto de Retro Sale in favor of Alberta
Morales. Three (3) years later, Arnold and Lilia executed a Deed of Definite Sale of Shares, Rights,
Interests and Participations in favor of Alberta Morales.
Alberta possessed the lot as owner, constructed a house thereon and appointed a caretaker
to oversee her property. Thereafter, vendor Arnold de la Flor borrowed the OCT of the sold lot
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from Alberta after executing a document by which he re recognized that the held the same in trust
for Alberta. Arnold and Angela, without the knowledge of Alberta, executed a Deed of Extrajudicial
Settlement declaring the two of them as the only co-owners of the undivided 1,198 sq. m. lot
originally owned by their grandparents, without acknowledging their previous sale of 748 sq. m.
thereof to Alberta. Alberta and her nieces asked Arnold for the OCT of the land but Arnold just
kept on promising to return it. Upon the death of Angela, Arnold executed an Affidavit of
Settlement of the Estate of Angela, declaring himself as the sole heir of Angela and thus
consolidating the title of the entire lot in his name.
When Alberta Morales died, her nieces succeeded in the ownership of the lot. After
Alberta’s heirs left for the States, Arnold subdivided the entire lot into three sublots using the OCT
which she borrowed from Alberta, and registered them all under his name. He sold lot nos. 265-B
& C to petitioner spouses Tomas and Sylvina Occeña, which included the 748 sq. m. portion
previously sold to Alberta Morales
After the death of Arnold, the three (3) nieces-heirs of Alberta Morales learned about the
second sale of their lot to the Occeña spouses when they were notified by caretaker Abas that they
were being ejected from the land. The heirs filed a case for annulment of sale and cancellation of
titles, with damages, against the second vendees Occeña spouses. They maintained that petitioners
were not buyers in good faith since at the time of the occular survey, the latter acquired
knowledge of the adverse possession of respondents and contented themselves with the
representation of the vendor that respondents were merely squatters. The Occeña spouses alleged
in their answer that they were buyers in good faith and the same was evidenced by their act of
verifying with the register of deeds that the land they purchased was free from any liens and
encumbrances. The Occeñas likewise set up the defenses of laches and prescription.
After trial, the lower court rendered a decision declaring the Occeña spouses as buyers in
good faith and ruled that the action of the heirs was time-barred. On appeal by Alberta’s heirs,
the Court of Appeals reversed the decision of the trial court.
ISSUES:
1. Are petitioners purchasers in good faith?
2. Are petitioners obliged to look beyond the title to the purchased land?
3. Are petitioners barred by prescription or laches?
HELD: 1. NO. The petition at bar presents a case of double sale of an immovable property.
Article 1544 of the New Civil Code provides that in case an immovable property is sold to different
vendees, the ownership shall belong: (1) to the person acquiring it who in good faith first recorded
it in the Registry of Property; (2) should there be no inscription, the ownership shall pertain to the
person who in good faith was first in possession; and, (3) in the absence thereof, to the person who
presents the oldest title, provided there is good faith.
In all cases, good faith is essential. It is the basic premise of the preferential rights granted
to the one claiming ownership over an immovable. What is material is whether the second buyer
first registers the second sale in good faith, i.e., without knowledge of any defect in the title of the
property sold. The defense of indefeasibility of a Torrens title does not extend to a transferee who
takes the certificate of title in bad faith, with notice of a flaw.
The governing principle of prius tempore, potior jure (first in time, stronger in right)
enunciated under Art. 1544 has been clarified, thus:
. . . Knowledge by the first buyer of the second sale cannot defeat the first buyer’s rights except
when the second buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA
33). Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he
is first to register, since such knowledge taints his registration with bad faith (see also Astorga vs.
Court of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs. Cabaña (G.R. No. 56232, 22 June
1984, 129 SCRA 656), it was held that it is essential, to merit the protection of Art. 1544, second
paragraph, that the second realty buyer must act in good faith in registering his deed of sale (citing
Carbonell vs. Court of Appeals, 69 SCRA 99 and Crisostomo vs. CA, G.R. No. 95843, 02 September
1992).

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In the case at bar, we find that petitioner-spouses failed to prove good faith in their
purchase and registration of the land. A purchaser in good faith and for value is one who buys
property without notice that some other person has a right to or interest in such property and pays
its fair price before he has notice of the adverse claims and interest of another person in the same
property. So it is that the “honesty of intention” which constitutes good faith implies a freedom
from knowledge of circumstances which ought to put a person on inquiry. At the trial, Tomas
Occeña admitted that he found houses built on the land during its ocular inspection prior to his
purchase. He relied on the representation of vendor Arnold that these houses were owned by
squatters and that he was merely tolerating their presence on the land. Tomas should have verified
from the occupants of the land the nature and authority of their possession instead of merely
relying on the representation of the vendor that they were squatters, having seen for himself that
the land was occupied by persons other than the vendor who was not in possession of the land at
that time. The settled rule is that a buyer of real property in the possession of persons other than
the seller must be wary and should investigate the rights of those in possession. Without such
inquiry, the buyer can hardly be regarded as a buyer in good faith and cannot have any right over
the property. A purchaser cannot simply close his eyes to facts which should put a reasonable man
on his guard and then claim that he acted in good faith under the belief that there was no defect in
the title of his vendor. His mere refusal to believe that such defect exists or his willful closing of
his eyes to the possibility of the existence of a defect in his vendor’s title will not make him an
innocent purchaser for value if it later develops that the title was in fact defective, and it appears
that he would have notice of the defect had he acted with that measure of precaution which may
reasonably be required of a prudent man in a similar situation.
2. YES. Indeed, the general rule is that one who deals with property registered under the
Torrens system need not go beyond the same, but only has to rely on the title. He is charged with
notice only of such burdens and claims as are annotated on the title. However, this principle does
not apply when the party has actual knowledge of facts and circumstances that would impel a
reasonably cautious man to make such inquiry or when the purchaser has knowledge of a defect or
the lack of title in his vendor or of sufficient facts to induce a reasonably prudent man to inquire
into the status of the title of the property in litigation. One who falls within the exception can
neither be denominated an innocent purchaser for value nor a purchaser in good faith.
The evidence of the private respondents show that when Tomas Occeña conducted an
ocular inspection of the land prior to the second sale, Abas, the caretaker of the house which
Alberta Morales built on the land, personally informed Tomas that the lot had been previously sold
by the same vendor Arnold to Alberta Morales. With this information, the Occeñas were obliged to
look beyond the title of their vendor and make further inquiries from the occupants of the land as
to their authority and right to possess it. However, despite this information about a prior sale, the
Occeñas proceeded with the purchase in haste. They did not inquire from Abas how they could get
in touch with the heirs or representatives of Alberta to verify the ownership of the land. Neither do
the records reveal that they exerted effort to examine the documents pertaining to the first sale.
Having discovered that the land they intended to buy was occupied by a person other than the
vendor not in actual possession thereof, it was incumbent upon the petitioners to verify the extent
of the occupant’s possessory rights. The Occeñas did nothing and chose to ignore and disbelieve
Abas’ statement.
3. NO. On the third issue, we hold that the action to annul title filed by respondents-heirs
is not barred by laches and prescription. Firstly, laches is a creation of equity and its application is
controlled by equitable considerations. Laches cannot be used to defeat justice or perpetuate fraud
and injustice. Neither should its application be used to prevent the rightful owners of a property
from recovering what has been fraudulently registered in the name of another. Secondly,
prescription does not apply when the person seeking annulment of title or reconveyance is in
possession of the lot because the action partakes of a suit to quiet title which is imprescriptible. In
this case, Morales had actual possession of the land when she had a house built thereon and had
appointed a caretaker to oversee her property. Her undisturbed possession of the land for a period
of fifty (50) long years gave her and her heirs a continuing right to seek the aid of a court of equity
to determine the nature of the claim of ownership of petitioner-spouses. As held by this Court in
Faja vs. Court of Appeals:
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. . . There is settled jurisprudence that one who is in actual possession of a piece of land claiming
to be owner thereof may wait until his possession is disturbed or his title attacked before taking
steps to vindicate his right, the reason for the rule being, that his undisturbed possession gives him
a continuing right to seek the aid of a court of equity to ascertain and determine the nature of the
adverse claim and its effect on his own title, which right can be claimed only by one who is in
possession. . . . The right to quiet title to the property, seek its reconveyance and annul any
certificate of title covering it accrued only from the time the one in possession was made aware of
a claim adverse to his own, and it is only then that the statutory period of prescription commences
to run against such possessor.
In the case at bar, Morales’ caretaker became aware of the second sale to petitioner-
spouses only in 1991 when he received from the latter a notice to vacate the land. Respondents-
heirs did not sleep on their rights for in 1994, they filed their action to annul petitioners’ title over
the land. It likewise bears to stress that when vendor Arnold reacquired title to the subject
property by means of fraud and concealment after he has sold it to Alberta Morales, a constructive
trust was created in favor of Morales and her heirs. As the defrauded parties who were in actual
possession of the property, an action of the respondents-heirs to enforce the trust and recover the
property cannot prescribe. They may vindicate their right over the property regardless of the lapse
of time. Hence, the rule that registration of the property has the effect of constructive notice to
the whole world cannot be availed of by petitioners and the defense of prescription cannot be
successfully raised against respondents.
Redemption of Rural Lands; Requirement of Notice by Vendor mandatory
PRIMARY STRUCTURES CORP vs. SPS. ANTHONY and SUSAN VALENCIA

[G.R. No. 150060. August 19, 2003.]
VITUG
FACTS: Petitioner is the registered owner of registered owner of Lot 4523 situated in Liloan, Cebu,
with an area of 22,214 square meters. Adjacent to the lot of petitioner are parcels of land,
identified to be Lot 4527, Lot 4528, and Lot 4529 with a total combined area of 3,751 square
meters which Hermogenes Mendoza sold to respondent spouses. The above sale came to the
knowledge of herein petitioner when Mendoza sold to the former Lot No. 4820, a parcel of land also
adjacent to Lot 4523 belonging to petitioner. As a consequence of which, petitioner sent a letter
to respondents, signifying its intention to redeem the three lots. Petitioner sent another letter to
respondents tendering payment of the price paid to Mendoza by respondents for the lots.
Respondents however informed petitioner that they had no intention of selling the subject parcels
of land. Thereupon, invoking the provisions of Articles 1621 and 1623, petitioner filed an action
against respondents to compel the latter to allow the legal redemption of the lots. Petitioner
claimed that neither Mendoza, the previous owner, nor respondents gave formal or even just a
verbal notice of the sale of the lots as so required by Article 1623 of the Civil Code.
The RTC dismissed petitioner's complaint and respondents' counterclaim; both parties appealed the
decision of the trial court to the Court of Appeals. The appellate court affirmed the assailed
decision. Hence, this appeal.
ISSUE: Is petitioner entitled to the right of redemption under Art 1621.
HELD: YES. Whenever a piece of rural land not exceeding one hectare is alienated, the law grants
to the adjoining owners a right of redemption except when the grantee or buyer does not own any
other rural land. In order that the right may arise, the land sought to be redeemed and the
adjacent property belonging to the person exercising the right of redemption must both be rural
lands. If one or both are urban lands, the right cannot be invoked. The trial court found the lots
involved to be rural lands.
Article 1621 of the Civil Code expresses that the right of redemption it grants to an
adjoining owner of the property conveyed may be defeated if it can be shown that the buyer or
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grantee does not own any other rural land. There has been no evidence proffered to show that
respondents are not themselves owners of rural lands for the exclusionary clause of the law to
apply.
Article 1623 of the Civil Code provides that the right of legal pre-emption or redemption
shall not be exercised except within thirty days from notice in writing by the prospective vendor, or
by the vendor, as the case may be. In stressing the mandatory character of the requirement, the
law states that the deed of sale shall not be recorded in the Registry of Property unless the same is
accompanied by an affidavit of the vendor that he has given notice thereof to all possible
redemptioners. The Court of Appeals has equated the statement in the deed of sale to the effect
that the vendors have complied with the provisions of Article 1623 of the Civil Code, as being the
written affirmation under oath, as well as the evidence, that the required written notice to
petitioner under Article 1623 has been met. Respondents, like the appellate court, overlook the
fact that petitioner is not a party to the deed of sale between respondents and Mendoza and has
had no hand in the preparation and execution of the deed of sale. It could not thus be considered a
binding equivalent of the obligatory written notice prescribed by the Code.
Wherefore, Petitioner is hereby given a period of thirty days from finality of this decision within
which to exercise its right of legal redemption.
PARTNERSHIP, AGENCY AND TRUSTS

Share of the partners in the assets of the partnership after its dissolution and winding-up
LUZVIMINDA J. VILLAREAL, ET. AL. vs. DONALD EFREN C. RAMIREZ, ET. AL.
[G.R. No. 144214. July 14, 2003.]
PANGANIBAN
FACTS: For the operation of a restaurant and catering business, Luzviminda J. Villareal, Carmelito
Jose and Jesus Jose formed a partnership with a capital of P 750,000.00 under the name “Aquarius
Food House and Catering Services”. Later, respondent Donald Efren C. Ramirez joined as a
partner. His capital contribution was paid by his parents, respondents Cesar and Carmelita Ramirez.
By agreement of the partners, the capital contribution of P 250, 000. 00 was returned to
Jesus Jose after he withdrew form the partnership.
Without prior knowledge of respondents, petitioners closed sown the restaurant allegedly
because of increased in rental. The restaurant furniture and equipment were deposited in the
respondents’ house for storage.
Respondent spouses wrote a letter to petitioners saying that they were no longer interested
in continuing their partnership or in reopening the restaurant and that they were accepting the
latter’s offer to return their capital contributions.
Another letter written by respondent Carmelita Ramirez was sent to petitioners informing
the latter of the deterioration of the restaurant furniture and equipment stored n their house. She
also reiterated the request for the return of their one-third share in the equity of the partnership.
However, the repeated oral and written requests were left unheeded.
Respondents instituted a complaint for the collection of a sum of money. In their answer,
petitioners contended that respondents expresses a desire to withdraw from the partnership and
had called for its dissolution under Articles 1830 and 1831 of the civil Code and that the latter had
no right to demand a return of their equity because their share, together with the rest of the
capital of the partnership had been spent as a result of irreversible business losses.
In their reply, respondents alleged that they did not know of any loan encumbrance on the
restaurant. According to them, if such allegation were true, then the loans incurred by petitioners
should be regarded as purely personal and as such, not chargeable to the partnership.
The trial court rendered a judgment in favor respondents and ordered petitioners to pay
jointly and severally actual damages, attorney’s fee and costs of suit. It ruled that the parties had
voluntarily entered into a partnership which could be dissolved at any time. Petitioners clearly
intended to dissolve it when they stopped operating the restaurant.
Upon appeal to the Court of Appeals, the appellate court held that although respondents
had no right to demand the return of their capital contribution, the partnership was nonetheless
dissolved when petitioners lost interest in continuing the restaurant business with them. Because
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petitioners never gave a proper accounting of the partnership accounts for liquidation purposes and
because no sufficient evidence was presented to show financial losses, the CA ordered the
petitioners jointly and severally to reimburse to respondents the amount of P 253, 114. 00.
ISSUES:
1. Were respondents correct in seeking from petitioners, in the latter’s personal capacity,
the return of their equity share in the partnership?
2. Was the partnership as a separate and distinct juridical entity bound to return to
respondent its original equity share?
HELD: 1. NO. We hold that respondents have no right to demand from petitioners the return of
their equity share. Except as managers of the partnership, petitioners did not personally hold its
equity or assets. “The partnership has a juridical personality separate and distinct from that of
each of the partners.” Since the capital was contributed to the partnership, not to petitioners, it is
the partnership that must refund the equity of the retiring partners.
2. NO. Since it is the partnership, as a separate and distinct entity, that must refund the
shares of the partners, the amount to be refunded is necessarily limited to its total resources. In
other words, it can only pay out what it has in its coffers, which consists of all its assets. However,
before the partners can be paid their shares, the creditors of the partnership must first be
compensated. After all the creditors have been paid, whatever is left of the partnership assets
becomes available for the payment of the partners’ shares.
Evidently, in the present case, the exact amount of refund equivalent to respondents’ one-
third share in the partnership cannot be determined until all the partnership assets will have been
liquidated—in other words, sold and converted to cash—and all partnership creditors, if any, paid.
The CA’s computation of the amount to be refunded to respondents as their hare was thus
erroneous.
We cannot sustain the underlying idea that the capital contribution at the beginning of the
partnership remains intact, unimpaired and available for distribution or return to the partners.
Such idea is speculative, conjectural and totally without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the changing
fortunes of the business. In the present case, the financial statements presented before the trial
court showed that the business had made meager profits. However, notable therefrom is the
omission of any provision for the depreciation of the furniture and the equipment. The amortization
of the goodwill (initially valued at P500, 000) is not reflected either. Properly taking these non-cash
items into account will show that the partnership was actually sustaining substantial losses, which
consequently decreased the capital of the partnership. Both the trial and appellate courts in fact
recognized the decrease of the partnership assets to almost nil, but the latter failed to recognize
the consequent corresponding decrease of the capital.
Because of the above-mentioned transaction, the partnership capital was actually reduced.
When petitioners and respondents ventured into business together, they should have prepared for
the fact that their investment would either grow or shrink. In the present case, the investment of
respondents substantially dwindled. The original amount of P 250, 000 which they had invested
could no longer be returned to them, because one-third of the partnership properties at the time of
dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties from the effects of
unwise, foolish or disastrous contracts they have entered into with all the required formalities and
with full awareness of what they were doing. Courts have no power to relieve them from
obligations they have voluntarily assumed, simply because their contracts turn out to be disastrous
deals or unwise investments.
Extent of SPA; Effect of lapse of considerable period of time since its execution
(Sales and Lease),
Law)
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SALOME M. CASTILLO vs. COURT OF APPEALS

[G.R. No. 159971. March 25, 2004.]
TINGA
FACTS: Petitioner Salome Castillo is a resident of Long Beach, California, U.S.A. and is the owner
of a registered parcel of land located in Sampaloc, Manila. On June 5, 1989, she executed a special
power of attorney (SPA) in favor of her son, Atty. Jose Castillo (Castillo), authorizing him, among
others, to sell the property for the sum of P2,800,000. Jose Castillo then put up an advertisement
that the subject land was for sale, and herein respondent, Erlinda Asedillo, replied and approached
Castillo, inquiring about the property. According to Jose Castillo, Asedillo allegedly agreed to
purchase the property in the amount of P2, 437, 500 and issued a check in the amount of P100,000
as “earnest money”. However, on the same day the check was given to Castillo, Asedillo also issued
a stop payment order of the check, citing the lis pendens annotated in the certificate of title of the
property as the reason. Despite Jose Castillo’s repeated demands to collect payment of the
purchase price, Asedillo refused, hence, Jose Castillo, representing herein petitioner, filed a case
against respondents.
Castillo alleged that there was a perfected contract of sale between him and the
respondents, and the payment of P100,000 constituted as “earnest money” in relation to the sale,
and presented evidence of a receipt to that effect. Respondents however, allege that no such sale
was ever perfected, and that they were still in the preliminary stages and merely conducting
negotiations. Castillo initially demanded a higher amount as a deposit but respondent only agreed
to deposit P100,000. They also questioned the validity of the SPA issued by petitioner to Castillo,
whether Salome Castillo was still alive considering that Castillo was already in his mid-sixties at the
time of the alleged sale, and whether the property was paraphernal. The trial court ruled in favor
of respondents, holding that there was no contract of sale, but only a contract to sell which
depended on the conditons laid down by respondents. On appeal, the case was dismissed for failure
to comply with procedural requirements, hence the present petition.
ISSUE: Is Jose Castillo authorized, pursuant to the Special Power of Attorney, to file suite against
respondents?
HELD: NO. While certain powers in connection with possible litigation involving the property are
mentioned in the SPA, significantly it does not include the authority to decide for Soledad Castillo
whether or not to file a case in her behalf, let alone an action for the forfeiture of "earnest money"
which was not paid in cash but by check and is not supported by any written agreement. What is
not included should be deemed excluded.
Even on the assumption that Jose Castillo is empowered under the SPA to file the complaint
with the MTC and the present Petition before this Court, still in view of the lapse of a considerable
period of time since the time of its execution in 1989 it is doubtful that it still retained in efficacy
at the time the present Petition was filed. In fact, the respondents had raised doubts whether the
SPA was still effective five (5) years after it was executed. In 1994 when the MTC case was filed,
Jose Castillo appeared to the respondents to be in his sixties. Hence, the respondents entertained
skepticism as to whether Salome Castillo was still alive and, correspondingly, whether the SPA was
still binding at that time. The same misgivings are relevant today ten (10) years later, in fact more
than ever, if not on Soledad Castillo's existence but certainly on her mental capacity in view of her
advanced age. As noted before, in filing the current Petition, Jose Castillo relied on the same SPA
which her mother executed fifteen years ago.
Lease of a property for more than a year is an act of dominion which requires a special power
of attorney
PROPERTY: Estoppel in Pais; Essential Elements
LTD: person dealing with registered land is not required to go beyond the certificate to
determine the condition of the property; Exception
SHOPPER’S PARADISE REALTY AND DEVELOPMENT CORP. vs EFREN ROQUE

CHAIRPERSONS
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[GR No. 148775. JANUARY 13, 2004.]
VITUG
FACTS: On December 26, 1976, Dr. Felipe Roque and his wife conveyed to their son Efren Roque by
way of donation inter vivos, which the latter accepted, a parcel of land located a Plaza Novaliches,
Quezon City. As Efren Roque was living in the United States, the title to the said property
remained in the name of Dr. Felipe Roque.
On December 23, 1993, herein petitioner entered into a 25-year lease contract over the
property donated to herein respondent with Dr. Felipe Roque. A memorandum of agreement for
the construction, development and operation of a commercial building complex on the property
was executed by the parties on that same day. It was agreed by the parties that the
abovementioned documents, both notarized, would be annotated on the title to the property. The
same, however, did not materialize due to the untimely death of Dr. Roque.
The death of Dr. Roque prompted respondent to return to the Philippines. It was at this
moment that he came to know of the contract entered into by petitioner and his deceased father
involving the property donated to him.
On February 15, 1995, respondent filed a case for annulment of the contract of lease and
the memorandum of agreement alleging that he is the owner of the subject property and that his
father had no authority to enter into the assailed agreements with petitioner.
The court a quo dismissed respondent’s complaint. The Court of Appeals however reversed
the above decision and held to be invalid the contract of lease and the memorandum of agreement.
The CA concluded that petitioner was not a lessee in good faith since it had prior knowledge of the
donation in favor of respondent as evidenced by the testimony of Veredigno Atienza who affirmed
that the contract of lease was executed after petitioner acquired knowledge that the property has
already been donated to respondent.
ISSUES:
1. Was the agreement invalid due to petitioner’s knowledge of the donation made to
respondent regarding the subject property?
2. Was Dr. Roque authorized to enter into the assailed agreements with petitioner?
3. Is respondent estopped from repudiating the contracts?
HELD: 1. YES. The existence, albeit unregistered, of the donation in favor of respondent is
undisputed. The trial court and the appellate court have not erred in holding that the non-
registration of a deed of donation does not affect its validity. As being itself a mode of acquiring
ownership, donation results in an effective transfer of title over the property from the donor to the
donee. In donations of immovable property, the law requires for its validity that it should be
contained in a public document, specifying therein the property donated and the value of the
charges which the donee must satisfy. The Civil Code provides, however, that "titles of ownership,
or other rights over immovable property, which are not duly inscribed or annotated in the Registry
of Property (now Registry of Land Titles and Deeds) shall not prejudice third persons." It is enough,
between the parties to a donation of an immovable property, that the donation be made in a public
document but, in order to bind third persons, the donation must be registered in the Registry of
Property (Registry of Land Titles and Deeds). Consistently, Section 50 of Act No. 496 (Land
Registration Act), as so amended by Section 51 of P.D. No. 1529 (Property Registration Decree),
states:
"SECTION 51. Conveyance and other dealings by registered owner. — An owner of
registered land may convey, mortgage, lease, charge or otherwise deal with the same in
accordance with existing laws. He may use such forms of deeds, mortgages, leases or other
voluntary instruments as are sufficient in law. But no deed, mortgage, lease, or other voluntary
instrument, except a will purporting to convey or affect registered land shall take effect as a
conveyance or bind the land, but shall operate only as a contract between the parties and as
evidence of authority to the Register of Deeds to make registration.

(Sales and Lease),
Law)
106
AW
"The act of registration shall be the operative act to convey or affect the land insofar as
third persons are concerned, and in all cases under this Decree, the registration shall be made in
the office of the Register of Deeds for the province or city where the land lies."(emphasis supplied)
A person dealing with registered land may thus safely rely on the correctness of the
certificate of title issued therefor, and he is not required to go beyond the certificate to determine
the condition of the property 7 but, where such party has knowledge of a prior existing interest
which is unregistered at the time he acquired a right thereto, his knowledge of that prior
unregistered interest would have the effect of registration as regards to him.
The appellate court was not without substantial basis when it found petitioner to have had
knowledge of the donation at the time it entered into the two agreements with Dr. Roque. During
their negotiation, petitioner, through its representatives, was apprised of the fact that the subject
property actually belonged to respondent.
2. NO. It was not shown that Dr. Felipe C. Roque had been an authorized agent of
respondent.
In a contract of agency, the agent acts in representation or in behalf of another with the
consent of the latter. Article 1878 of the Civil Code expresses that a special power of attorney is
necessary to lease any real property to another person for more than one year. The lease of real
property for more than one year is considered not merely an act of administration but an act of
strict dominion or of ownership. A special power of attorney is thus necessary for its execution
through an agent.
3. NO. Neither is respondent estopped from repudiating the contracts. The essential
elements of estoppel in pais, in relation to the party sought to be estopped, are: 1) a clear conduct
amounting to false representation or concealment of material facts or, at least, calculated to
convey the impression that the facts are otherwise than, and inconsistent with, those which the
party subsequently attempts to assert; 2) an intent or, at least, an expectation, that this conduct
shall influence, or be acted upon by, the other party; and 3) the knowledge, actual or constructive,
by him of the real facts. With respect to the party claiming the estoppel, the conditions he must
satisfy are: 1) lack of knowledge or of the means of knowledge of the truth as to the facts in
question; 2) reliance, in good faith, upon the conduct or statements of the party to be estopped;
and 3) action or inaction based thereon of such character as to change his position or status
calculated to cause him injury or prejudice. It has not been shown that respondent intended to
conceal the actual facts concerning the property; more importantly, petitioner has been shown not
to be totally unaware of the real ownership of the subject property.
Trust Relation
Laches
LTD: Indefeasibility Of Title
HEIRS OF MIGUEL FRANCO vs. COURT OF APPEALS

[G.R. No. 123924. December 11, 2003.]
TINGA
FACTS: Quintin was the patentee of a parcel of public land situated in Zamboanga del Norte with
OCT No. P-436 issued in his name. Quintin Franco died intestate on 8 December 1967. His brother,
Miguel Franco filed a Petition for Issuance of Letters of Administration intestate court, praying that
he be appointed as administrator of Quintin's estate. This Petition was opposed by Faustina Franco
Vda. De Cabading, the sister of the decedent, on the ground that Miguel was unfit to be the
administrator. She prayed for her own appointment as administratrix instead of Miguel. Upon
motion of Miguel, the intestate court appointed him as special administrator of the estate.
However, Faustina moved for the latter's removal as special administrator.
On 27 August 1973, the intestate court issued an Order declaring Quintin as the absolute
owner of the subject property. Miguel was then removed as special administrator since he was
claiming ownership over half of the subject property, his conflicting interest rendered him
incapable of rendering a true and faithful account of the estate.
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Miguel filed a Motion for Reconsideration wherein he alleged for the first time that one-half
of the subject property was transferred to him by virtue of a document entitled "General Power of
Administration" and executed by Quintin in 1967. It was also discovered that on the basis of this
"General Power of Administration" Miguel had filed a Petition dated 2 January 1972 before the CFI
of Dipolog seeking the cancellation of OCT No. P-436. This Petition was granted wherein it was
directed that the new TCTs be issued, one in the name of the heirs of Quintin and the other name
of Miguel. Thus, Miguel was able to obtain TCT No. T-20203, covering half of the subject property.
The other heirs immediately asked the intestate court to cancel TCT No. T-20203. The
intestate court issued an order canceling TCT No. T-20203 issued in the name of Miguel, on the
ground that Miguel's acquisition of the title was fraudulent. The CA reversed the decision of the
intestate court. According to the appellate court, the intestate court had no jurisdiction to settle
questions of property ownership. The SC affirmed the ruling of the Court of Appeals.
Consequently, private respondents filed before the RTC a complaint, seeking the
cancellation of TCT No. T-20203 in the name of Miguel, who had died in the meantime. After trial,
the RTC rendered a decision dismissing the complaint. The RTC found that the "General Power of
Administration" evinced an existing trust relation between Quintin and his brother Miguel, with
Quintin as the signatory thereof acknowledging that he was holding half of the property titled in his
name in trust for Miguel. Applying Article 1452 of the Civil Code, the RTC concluded that a trust
had been created by force of law in favor of Miguel to the extent of one-half of the property. The
CA reversed the RTC decision, ordering the cancellation of TCT No. T-20203 and directing the
issuance of a new transfer certificate of title in the name of the Heirs of Quintin. Hence,this
petition.
ISSUES:
1. Is Miguel Franco guilty of laches in claiming ownership over ½ of the property?
2. Did the registration of ½ of the property in the name of Miguel violate the principle of
indefeasibility of Torrens title in favor of Quintin?
3. Does the document entitled "General Power of Administration" admit of an existing trust
relation between the signatories Quintin and Miguel?
HELD: 1. YES. While Miguel explicitly declared that the subject property belonged to Quintin, at
the same time he was remarkably silent about his claim that he acquired one-half thereof during
the lifetime of Quintin. He asserted his claim to the subject property quite belatedly, i.e., four
years after he stated under oath and in a court pleading that it belonged in its entirety to his
brother. This tolerant silence militates against Miguel Franco's claim of co-ownership. Juxtaposed
with his previous judicial admission of Quintin Franco's absolute ownership of the land, it is not
difficult to see that the act of Miguel Franco in registering one-half of the property in his name was
an insidious and surreptitious, if not belated, maneuver to deprive the legal heirs of Quintin Franco
of their lawful share and interest in the property.
2. YES. Under the Land Registration Act, title to the property covered by a Torrens title
becomes indefeasible after the expiration of one year from the entry of the decree of registration.
The decree is incontrovertible and becomes binding on all persons whether or not they were
notified of, or participated in, the in rem registration process. OCT No. P-436, covering the subject
property in its entirety, was registered as early as 9 July 1954 in the name of Quintin. A Torrens
title is the best evidence of ownership of registered land. Whatever claim of ownership Miguel had
raised should have been weighed against Quintin's title. Unfortunately, the Dipolog RTC apparently
ignored this fundamental principle when it issued the Order directing the registration of half of the
subject property in the name of Miguel.
3. NO. Under Article 1452 of the New Civil Code: If two or more persons agree to purchase
property and by common consent the legal title is taken in the name of one of them for the benefit
of all, a trust is created by force of law in favor of the others in proportion to the interest of each.
Article 1452 presupposes the concurrence of two requisites before a trust can be created,
namely: that two or more persons agree to purchase a property, and that they consent that one
(Sales and Lease),
Law)
108
AW
should take the title in his name for everyone's benefit. The aforementioned provision is not
applicable in this case, as it clearly speaks of an instance when the property is acquired through a
joint purchase by two or more persons. That circumstance is not present in this case since the
subject property was acquired through Quintin's application for a patent. There is no proof that
Miguel had joined Quintin in acquiring the property.
Prescriptive period in implied trusts; Reckoning point in counting the prescriptive period
SPOUSES RICARDO PASCUAL and CONSOLACION SIOSON vs. COURT OF APPEALS

[G.R. No. 115925. August 15, 2003.]
CARPIO
FACTS: Petitioner Consolacion Sioson and private respondent Remedios Eugenio-Gino are the niece
and granddaughter of Cunuto Sioson who, together with Catalina and Victorian, each owned 10/70
share or 1,335 square meters of a parcel of land known as Lot 2 of Plan PSU 13245 in Tanza,
Navotas, Metro Manila.
On November 20, 1951, Canuto had Lot 2 surveyed and subdivided into eight lots (Lot Nos.
2-A to 2-H). Lot No. 2-A and 2-E with an area of 670 square meters and 2,000 square meters
respectively were placed in Canuto’s name.
On September 26, 1956, Canuto sold his share in Lot 2 in favor of petitioner Consolacion
Sioson who immediately took possession of Lots 2-A and 2-E and declared the same in her name for
taxation purposes. The above sale was recognized by Canuto’s children who executed an affidavit
to that effect. On the strength of the Deed of Sale executed by Canuto and the Affidavit executed
by Canuto’s children, the Register of Deeds issued to Consolacion TCT No. (232252) 1321 covering
Lots 2-A and 2-E with a total area of 2,671 sqare meters.
On February 4, 1988, herein respondent filed a complaint against petitioner spouses for
Annulment or Cancellation of Transfer Certificate of Title and Damages, claiming that she is the
owner of Lot Nos 2-A and 2-E by virtue of the last will and testament of Catalina where the said lots
were devised to her. Respondent further alleged that Consolacion obtained title to the disputed
lots by means of fraud since the area covered by TCT No. (232252)1321 is twice the size of Canuto’s
share in Lot 2.
After trial on the merits, the court a quo rendered a decision in favor of petitioner after
holding that the action filed by Remedios which was based on fraud had already prescribed, the
same having been filed only on February 4, 1998.
On appeal, the Court of Appeals reversed the decision of the court a quo after it found that
what Remedios filed was a suit to enforce and implied trust allegedly created in her favor when
Consolacion fraudulently registered her title over Lots 2-A and 2-E. As such, the prescriptive period
is 10 years and not 4 years. Consequently, the CA held that the 10 year prescriptive period had not
yet expired when Remedios filed her complaint on February 4, 1998 from November 19, 1982 when
she came to know of petitioner’s adverse title.
ISSUE: Was Remedios’ cause of action is barred by prescription?
HELD: YES. What REMEDIOS filed was an action to enforce an implied trust but the same is
already barred by prescription.
The four-year prescriptive period relied upon by the trial court applies only if the fraud
does not give rise to an implied trust, and the action is to annul a voidable contract under Article
1390 of the Civil Code. In such a case, the four-year prescriptive period under Article 1391 begins
to run from the time of discovery of the mistake, violence, intimidation, undue influence or fraud.
In the present case, REMEDIOS does not seek to annul the KASULATAN. REMEDIOS does not
assail the KASULATAN as a voidable contract. In fact, REMEDIOS admits the validity of the sale of
1,335 square meters of land under the KASULATAN. However, REMEDIOS alleges that the excess
area of 1,335 meters is not part of the sale under the KASULATAN. REMEDIOS seeks the removal of
this excess area from TCT No. (232252) 1321 that was issued to CONSOLACION. Consequently,
REMEDIOS' action is for "Annulment or Cancellation of Transfer Certificate [of Title] and Damages."

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REMEDIOS' action is based on an implied trust under Article 1456 since she claims that the
inclusion of the additional 1,335 square meters in TCT No. (232252) 1321 was without basis. In
effect, REMEDIOS asserts that CONSOLACION acquired the additional 1,335 square meters through
mistake or fraud and thus CONSOLACION should be considered a trustee of an implied trust for the
benefit of the rightful owner of the property. Clearly, the applicable prescriptive period is ten
years under Article 1144 and not four years under Articles 1389 and 1391.
It is now well-settled that the prescriptive period to recover property obtained by fraud or
mistake, giving rise to an implied trust under Article 1456 15 of the Civil Code, is ten years
pursuant to Article 1144. This ten-year prescriptive period begins to run from the date the adverse
party repudiates the implied trust, which repudiation takes place when the adverse party registers
the land.
REMEDIOS filed her complaint on 4 February 1988 or more than years after CONSOLACION
registered her title over Lot Nos. 2-A and 2-E on 28 October 1968. Unquestionably, REMEDIOS filed
the complaint late thus warranting its dismissal.
CREDIT TRANSACTIONS
Interest Rates; When Iniquitous or Unconscionable
MANSUETO CUATON vs. REBECA SALUD

[GR No. 158382. JANUARY 27, 2004.]
YNARES-SANTIAGO
FACTS: Petitioner Maunsueto Cuaton obtained from private respondent a P1million loan with
interest at the rate of 8% to 10% per month. The above loan was secured by a real estate mortgage
involving a parcel of land registered in the name of Conchita Cuaton.
The real estate mortgage was subsequently declared void by the court on the ground that it
was executed by Mansueto Cuaton in favor of respondent without expressly stating that he was
merely acting as a representative of Conchita Cuaton, the real owner of the mortgaged property.
The court, however, ordered petitioner to pay respondent the loan secured by the mortgage in the
amount of P1million plus a total of P610,000.00 representing interests of 10% and 8% per month for
the period February 1992 to August 1992.
Petitioner elevated the case to the Court of Appeals who sustained the decision of the
court a quo.
ISSUE: Is the 8% to 10% monthly interest rates imposed on the P1million loan obligation of
petitioner valid?
HELD: NO. In Ruiz v. Court of Appeals, we declared that the Usury Law was suspended by Central
Bank Circular No. 905, s. 1982, effective on January 1, 1983, and that parties to a loan agreement
have been given wide latitude to agree on any interest rate. However, nothing in the said Circular
grants lenders carte blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets. The stipulated interest rates are illegal if
they are unconscionable.
Thus, in Medel v. Court of Appeals, and Spouses Solangon v. Salazar, 11 the Court annulled
a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month
or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous,
unconscionable and exorbitant. In both cases, the interest rates were reduced to 12% per annum.
In the present case, the 10% and 8% interest rates per month on the one-million-peso loan
of petitioner are even higher than those previously invalidated by the Court in the above cases.
Accordingly, the reduction of said rates to 12% per annum is fair and reasonable.
Stipulations authorizing iniquitous or unconscionable interests are contrary to morals
('contra bonos mores'), if not against the law. Under Article 1409 of the Civil Code, these contracts

(Sales and Lease),
Law)
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are inexistent and void from the beginning. They cannot be ratified nor the right to set up their
illegality as a defense be waived.
Moreover, the contention regarding the excessive interest rates cannot be considered as an
issue presented for the first time on appeal. The records show that petitioner raised the validity of
the 10% monthly interest in his answer filed with the trial court. To deprive him of his right to
assail the imposition of excessive interests would be to sacrifice justice to technicality.
Furthermore, an appellate court is clothed with ample authority to review rulings even if they are
not assigned as errors. This is especially so if the court finds that their consideration is necessary in
arriving at a just decision of the case before it. We have consistently held that an unassigned error
closely related to an error properly assigned, or upon which a determination of the question raised
by the error properly assigned is dependent, will be considered by the appellate court
notwithstanding the failure to assign it as an error. Since respondents pointed out the matter of
interest in their Appellants' Brief 16 before the Court of Appeals, the fairness of the imposition
thereof was opened to further evaluation. The Court therefore is empowered to review the same.
The case of Eastern Shipping Lines, Inc. v. Court of Appeals, laid down the following
guidelines on the imposition of interest, to wit:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
xxx xxx xxx
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
Applying the foregoing rules, the interest of 12% per annum imposed by the Court (in lieu of
the invalidated 10% and 8% per month interest rates) on the one-million-peso loan should be
computed from the date of the execution of the loan on October 31, 1991 until finality of this
decision. After the judgment becomes final and executory until the obligation is satisfied, the
amount due shall further earn interest at 12% per year.
Guidelines on Award and Payment of Interests

OBLIGATIONS: Consignation
SPOUSES HENDRIK and ALICIA S. BIESTERBOS vs. COURT OF APPEALS

[G.R. No. 152529. September 22, 2003.]
VITUG
FACTS: In April 1992, respondent Efren Bartolome entered into a contract to sell a house and lot
with petitioners spouses Biesterbos, the property at the time being mortgaged to the Philippine
National Bank (PNB). In the said contract, the parties agreed to certain stipulations, some of which
include an immediate transfer of ownership upon the giving of the initial downpayment by the
petitioners to respondent, and that respondent will advance P600,000 as cost of the adjacent
vacant lot which will be reimbursed by the petitioners after a reasonable time on or before July 30,
1992 when ownership has been transferred to the buyers, among other conditions.
Subsequently, petitioners paid the requisite downpayment over the property, and in
conformance with the agreement, respondent advanced the P600,000 as cost for the adjacent
vacant lot. Petitioners however, were unable to allegedly pay their remaining obligations, including
the amount advanced by respondent, within the given period under the contract, though it was
admitted later on by respondent that he continued to receive payment from petitioners even after
the stipulated period. Despite such payments however, respondent claimed that there was still a
remaining balance left unpaid by petitioners, and despite repeated demands made by Bartolome,
the petitioners failed to pay the amounts stated by respondent, prompting the latter to file suit
against the spouses. Petitioners countered, by stating that they had opened an account with PNB
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depositing an amount “in trust for Mr. Efren Bartolome” which he could withdraw at anytime during
banking hours, representing their consignation for their obligation. They also averred that the
period stated in the contract was novated when respondent continued to receive payment even
after the stipulated deadline, hence they have complied with their obligation to respondent. The
trial court ruled in favor of the petitioners that they have complied with their obligation, but
ordered the spouses to reimburse the amount advanced by respondent, the order for consignation
having been denied, and directed respondent to effect immediate transfer of ownership of the
property. On appeal, the decision was affirmed but modified to include payment of interest at the
rate of 12% per annum, with regard to the payment to be made by the petitioners from the time of
default until full payment. Petitioners argue that there was grave abuse of discretion when the
appellate court ordered the payment of interest, considering that there was no such stipulation in
the agreement for payment of interest. They further averred that there was no need for them to
pay the P600,000 as there was already a valid tender of payment even before the filing of the
complaint, as evidenced by the account opened by the petitioners with PNB.
ISSUES:
1. Did the PNB account opened by the petitioners constitute a valid tender of payment for
their obligation under the contract?
2. Are respondents required to pay interest?
HELD: 1. NO. In their letter of 03 July 1993, likewise included among the stipulation of facts of
the parties during the pre-trial conference, petitioners, through counsel, informed respondent that
the former had deposited the amount of P521,691.76 "In Trust For Mr. Efren Bartolome" at the PNB,
Session Road, Baguio City, which sum could be withdrawn by respondent at anytime during banking
hours. While such a procedure did not strictly constitute a valid tender of payment and
consignation, still, it could be considered an act of good faith on the part of petitioners to fully
settle their obligation. Equity and justice would demand that such an act, placing at the disposal of
respondent the deposited sum, should have the effect of suspending the running of the interest on
said outstanding amount.
2. YES. With regard the payment of interest, the ruling of this Court in Eastern Shipping
Lines, Inc. vs. Court of Appeals should be worthwhile reiterating for guidance. Thus —
"I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on 'Damages' of the Civil Code govern in determining the measure of recoverable
damages.
"II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
"1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
"2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

(Sales and Lease),
Law)
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"3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit."
Guaranty; Surety; An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guarantee.
SPOUSES VICKY TAN TOH and LUIS TOH vs SOLID BANK CORPORATION, ET.AL.
[GR No. 154183. AUGUST 7, 2003.]
BELLOSILLO
FACTS: Herein petitioners, spouses Luis and Vicky were then chairman and vice-president,
respectively of First Business Paper Corporation (FBPC). Private respondents spouses Kenneth and
Ma. Victoria Ng Li were President and manager of the same corporation.
Respondent Solidbank Corporation agreed to extend an “omnibus line” credit facility woth
P10million in favor of respondent FBPC. One of the terms and conditions of the agreement which
was embodied in a “letter advise” of the bank was that herein petitioners together with respondent
spouses Kenneth and Ma. Victoria Ng Li would sign the Continuing Guarantee, a public document
prepared solely by the respondent bank. The terms of the instrument defined the contract arising
therefrom as a surety agreement and provided for the solidary liability of the signatories thereto
for and in consideration of "loans or advances" and "credit in any other manner to, or at the request
or for the account" of FBPC.
On January 16, 1993, respondent FBPC started to avail of the credit facility and procure
letters of credit. On November 17, 1993, FBPC opened 13 letters of credit and obtained loans
totaling P15,227,510.00. As the letters of credit were secured, FBPC, through its officers Kenneth
Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over
the goods allegedly purchased from the proceeds of the loans.
On January 13, 1994 respondent Bank received information that respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li had fraudulently departed from their conjugal home. On
January 14, 1994 the Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the
acceleration clause in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaid
overdue accounts on the letters of credit plus interests and penalties within twenty-four (24) hours
from receipt thereof. The Bank also invoked the Continuing Guaranty executed by petitioner-
spouses Luis Toh and Vicky Tan Toh who were the only parties known to be within national
jurisdiction to answer as sureties for the credit facility of FBPC.
After trial on the merits, the court a quo rendered a decision finding respondent FBPC
liable to Solidbank but absolving petitioner spouses of any liability holding that petitioners were not
bound by the surety contract since the letters of credit it was supposed to secure were opened long
after petitioners had ceased to be part of FBPC.
On appeal, the Court of Appeals modified the above decision and held that by signing the
Continuing Guarantee, petitioner spouses became solidarily liable with FBPC to pay respondent
bank ratiocinating that the surety agreement did not indicate that petitioners signed the same in
their capacity as officers of the FBPC only. Finally, the Court of Appeals rejected petitioners'
argument that there were "material alterations" in the provisions of the "letter-advise," i.e., that
only domestic letters of credit were opened when the credit facility was for importation of papers
and other materials, and that marginal deposits were not paid, contrary to the requirements stated
in the "letter-advise." The simple response of the appellate court to this challenge was, first, the
"letter-advise" itself authorized the issuance of domestic letters of credit, and second, the several
waivers extended by petitioners in the Continuing Guaranty, which included changing the time and
manner of payment of the indebtedness, justified the action of respondent Bank not to charge
marginal deposits.
ISSUES:
1. Are petitioners liable to Solidbank pursuant to Continuing Guarantee?

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2. Did the extension of the period granted by Solidbank in enforcing the indebtedness of
its debtors discharge petitioner’s liabilities as sureties?
HELD: 1. YES. This Court holds that the Continuing Guaranty is a valid and binding contract of
petitioner-spouses as it is a public document that enjoys the presumption of authenticity and due
execution. Although petitioners as appellees may raise issues that have not been assigned as errors
by respondent Bank as party-appellant, i.e., unenforceability of the surety contract, we are bound
by the consistent finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh
"voluntarily affixed their signature[s]" on the surety agreement and were thus "at some given point
in time willing to be liable under those forms." In the absence of clear, convincing and more than
preponderant evidence to the contrary, our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long as
they were corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts
their contractual undertaking to such condition or eventuality. In fact the obligations assumed by
them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and
assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you, your
successors, transferees and assigns," and that their commitment "shall remain in full force and
effect until written notice shall have been received by [the Bank] that it has been revoked by the
undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal
from FBPC, they could have simply terminated the agreement by serving the required notice of
revocation upon the Bank as expressly allowed therein.
2. NO. But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement
they signed so must we also hold respondent Bank to its representations in the "letter-advise" of 16
May 1993. Particularly, as to the extension of the due dates of the letters of credit, we cannot
exclude from the Continuing Guaranty the preconditions of the Bank that were plainly stipulated in
the "letter-advise." Fairness and justice dictate our doing so, for the Bank itself liberally applies the
provisions of cognate agreements whenever convenient to enforce its contractual rights, such as,
when it harnessed a provision in the trust receipts executed by respondent FBPC to declare its
entire indebtedness as due and demandable and thereafter to exact payment thereof from
petitioners as sureties. In the same manner, we cannot disregard the provisions of the "letter-
advise" in sizing up the panoply of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at
any time, or from time to time, in [its] discretion . . . extend or change the time payment," this
provision even if understood as a waiver is confined per se to the grant of an extension and does
not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the
authority of the Bank to defer collection contemplates only authorized extensions, that is, those
that meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its discretion pursuant to the
Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of
credit be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a
period of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment
per extension. This reading of the Continuing Guaranty is consistent with Philippine National Bank
v. Court of Appeals that any doubt on the terms and conditions of the surety agreement should be
resolved in favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or
omission of any kind on [the Bank's] part in the premises shall in any event affect or impair this
guaranty" must also be read "strictissimi juris" for the reason that petitioners are only
accommodation sureties, i.e., they received nothing out of the security contract they signed. Thus
said, the acts or omissions of the Bank conceded by petitioners as not affecting nor impairing the
surety contract refer only to those occurring "in the premises," or those that have been the subject
of the waiver in the Continuing Guaranty, and stretch to no other. Stated otherwise, an extension
of the period for enforcing the indebtedness does not by itself bring about the discharge of the
sureties unless the extra time is not permitted within the terms of the waiver, i.e., where there is
no payment or there is deficient settlement of the marginal deposit and the twenty-five percent
(Sales and Lease),
Law)
114
AW
(25%) consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of the
Civil Code, the liability of a surety is measured by the terms of his contract, and while he is liable
to the full extent thereof, his accountability is strictly limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial court that several
letters of credit were irrevocably extended for ninety (90) days with alarmingly flawed and
inadequate consideration — the indispensable marginal deposit of fifteen percent (15%) and the
twenty-five percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that
the requisite marginal deposit and security for every thirty (30)-day extension specified in the
"letter-advise" were not set aside or abrogated nor was there any prior notice of such fact, if any
was done.
The foregoing extensions of the letters of credit made by respondent Bank without
observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated
in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079
of the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty." This act of the Bank is not mere failure or delay on its part to
demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit
which the Bank did not extend, defer or put off, but comprises conscious, separate and binding
agreements to extend the due date, as was admitted by the Bank itself.
The consequence of these omissions is to discharge the surety, petitioners herein, under
Art. 2080 of the Civil Code, or at the very least, mitigate the liability of the surety up to the value
of the property or lien released if the creditor . . . has acquired a lien upon the property of a
principal, the creditor at once becomes charged with the duty of retaining such security, or
maintaining such lien in the interest of the surety, and any release or impairment of this security as
a primary resource for the payment of a debt, will discharge the surety to the extent of the value
of the property or lien released . . . [for] there immediately arises a trust relation between the
parties, and the creditor as trustee is bound to account to the surety for the value of the security
in his hands.
Solidary Liability of Surety
SPOUSES EDUARDO and EPIFANIA C. EVANGELISTA vs. MERCATOR FINANCE CORP.

[G.R. No. 148864. August 21, 2003.]
PUNO
FACTS: Petitioners owned five (5) parcels of land. Together with Embassy Farms, Inc., they
executed a Real Estate Mortgage on the said properties as security for a loan in favor of Mercator
Financing Corporation (Mercator). Upon petitioners’ failure to pay the loan, Mercator foreclosed
the mortaged properties and sold the same to respondent Salazar and to respondent Lamecs Realty
& Development Corporation (Lamecs).
Petitioners filed a complaint for annulment of titles against respondents, Mercator Finance
Corporation, Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of
Deeds of Bulacan. They alleged that they executed the Real Estate Mortgage in favor of only as
officers of Embassy Farms. They did not receive the proceeds of the loan evidenced by a promissory
note, as all of it went to Embassy Farms. Thus, they contended that the mortgage was without any
consideration as to them since they did not personally obtain any loan or credit accommodations.
There being no principal obligation on which the mortgage rests, the real estate mortgage is void.
Mercator contended that petitioners executed a Mortgage in their favor (Mercator) for and
in consideration of certain loans, and/or other forms of credit accommodations obtained from the
mortgagee amounting to P844,625.78, and to secure the payment of the same and those others that
the mortgagee may extend to the mortgagor . . ..'" It contended that since petitioners and
CHAIRPERSONS
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Embassy Farms signed the promissory note as co-makers, aside from the Continuing Suretyship
Agreement subsequently executed to guarantee the indebtedness of Embassy Farms, and the
succeeding promissory notes restructuring the loan, then petitioners are jointly and severally liable
with Embassy Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale
of the mortgaged properties are valid.
The RTC rendered a summary judgment dismissing the complaint. This decision was
affirmed by the CA. Hence, this petition.
ISSUE: Was the Court of appeals correct in holding petitioner liable as surety under the loan and
mortgage?
HELD: YES. Even if petitioners intended to sign the note merely as officers of Embassy Farms, still
this does not erase the fact that they subsequently executed a continuing suretyship agreement. A
surety is one who is solidarily liable with the principal. Petitioners cannot claim that they did not
personally receive any consideration for the contract for well-entrenched is the rule that the
consideration necessary to support a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. A surety is bound by the same
consideration that makes the contract effective between the principal parties thereto. Having
executed the suretyship agreement, there can be no dispute on the personal liability of petitioners.
Liability of a Surety; A guarantee may be given as security for future debts
PHILIPPINE BLOOMING MILLS, INC. and ALFREDO CHING vs COURT OF APPEALS

[GR No. 142381. OCTOBER 15, 2003.]
CARPIO
FACTS: Petitioner Alfredo Ching is the Senior Vice President of Philippine Blooming Mills, Inc.(PBM).
On July 21, 1988, Alfredo Ching in his personal capacity signed a Deed of Suretyship binding himself
“as primary obligor” and warranted to private respondent Traders Royal Bank (TRB) the “due and
punctual payment” by PBM of its obligation in the amount of P10,000,000.00.
On March 24 and August 6, 1980, TRB granted PBM letters of credit on application of Ching
in his capacity as Senior Vice-president of PBM. Ching thereafter accomplished and delivered to
TRB trust receipts, which acknowledged receipt in trust for TRB of the merchandise subject of the
letters of credit. Ching, furthermore, executed an Undertaking for each trust receipt whereby he
jointly and severally undertook and agreed “to pay on demand of TRB all sums and amounts which
the latter may call upon them to pay arising out of, pertaining to, and/or in any manner connected
with this receipt”.
On April 27, 1981, PBM obtained a P3.5 Million trust loan from TRB and Ching signed as co-
maker in the notarized Promissory Note which evidenced the said trust loan.
PBM defaulted in its payment of the abovementioned obligations.
On April 1, 1982, PBM and Ching filed with the SEC a petition for suspension of payments
and prayed that SEC will allow PBM to continue its normal business operations free from the
interference of its creditors. The SEC subsequently placed PBM’s assets, liabilities, and obligations
under the rehabilitation receivership of Kalaw, Escaler, and Associates.
On May 13, 1983, private respondent filed an action for collection of money against herein
petitioners. The court a quo subsequently dismissed the complaint against PBM, upon its motion,
on the ground that the SEC had already placed it under receivership. PBM and Ching thereafter
filed a motion to dismiss on the ground of lack of jurisdiction as the SEC has already taken
cognizance of the case. The same was opposed by TRB on the ground that Ching was being sued in
his personal capacity.
In his answer, Ching denied liability as surety and accommodation co-maker of PBM
asserting that the Deed of Suretyship date July 21, 1977 could not answer for obligations not yet in
existence at the time of its execution. Ching further asserts that as surety and solidary debtor, he
should benefit from the changed nature of the obligation as provided in Article 1222 of the Civil
(Sales and Lease),
Law)
116
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Code since it was established that the Board of Directors of TRB adopted a resolution fixing the PBM
account to an amount lower than what TRB wanted to collect from Ching.
After trial on the merits, the court a quo rendered a decision holding Ching liable under the
Deed of Suretyship. On appeal, the Court of Appeals affirmed the decision of the court a quo.
ISSUES:
1. Can Ching be held personally liable for credit obligations contracted by PBM against TRB
before and after the execution of the Deed of Suretyship?
2. Is Ching’s liability limited to the amount stated in PBM’s rehabilitation plan?
HELD: 1. YES. Ching can be sued separately to enforce his liability as surety for PBM, as expressly
provided by Article 1216 of the New Civil Code.
It is elementary that a corporation has a personality distinct and separate from its
individual stockholders and members. Being an officer or stockholder of a corporation does not
make one's property the property also of the corporation, for they are separate entities (Adelio
Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Ching's act of joining as a co-petitioner with PBM is SEC Case No. 2250 did not vest in the
SEC jurisdiction over his person or property, for jurisdiction does not depend on the consent or acts
of the parties but upon express provision of law (Tolentino vs. Social Security System, 138 SCRA
428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408).
Ching is liable for credit obligations contracted by PBM against TRB before and after the
execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself,
referring to amounts PBM "may now be indebted or may hereafter become indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code
provides:
A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secure.
Furthermore, this Court has ruled in Diño v. Court of Appeals that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of
which may not be known at the time the guaranty is executed. This is the basis for contracts
denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited
to a single transaction, but which contemplates a future course of dealing, covering; a series of
transactions, generally for an indefinite time or until revoked. It is prospective in its operation and
is generally intended to provide security with respect to future transactions within certain limits,
and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes
liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those
arising in the future, which are within the description or contemplation of the contract of guaranty,
until the expiration or termination thereof. A guaranty shall be construed as continuing when by
the terms thereof it is evident that the object is to give a standing credit to the principal debtor to
be used from time to time either indefinitely or until a certain period; especially if the right to
recall the guaranty is expressly reserved. Hence, where the contract states that the guaranty is to
secure advances to be made "from time to time," it will be construed to be a continuing one.
2. NO. Ching would like this Court to rule that his liability is limited, at most, to the
amount stated in PBM's rehabilitation plan. In claiming this reduced liability, Ching invokes Article
1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those which are personal to
him, or pertain to his own share. With respect to those which personally belong to the others, he
may avail himself thereof only as regards that part of the debt for which the latter are responsible.
In granting the loan to PBM, TRB required Ching's surety precisely to insure full recovery of
the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the
surety. Thus, Ching cannot use PBM's failure to pay in full as justification for his own reduced
liability to TRB. As surely, Ching agreed to pay in full PBM's loan in case PBM fails to pay in full for
any reason, including its insolvency.

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TRB, as creditor, has the right under the surety to proceed against Ching for the entire
amount of PBM's loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of thetas shall not be an obstacle to
those which may subsequently be directed against the others, so long as the debt has not been fully
collected.
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This
resolution states that PBM's outstanding loans may be reduced to P1.373 million subject to certain
conditions like the payment of P150,000 initial payment. The resolution also states that TRB should
not release Ching's solidary liability under his surety. The resolution even directs TRB's management
to study Ching's criminal liability under the trust documents.
Ching's own witness testified that Resolution No. 5935 was never implemented. For one,
PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the
document that PBM's receiver presented which would have released Ching from his suretyship.
Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his suretyship.
Foreclosure of mortgage: Exemptions of rural banks from publication requirement in

foreclosure
DARIA GONZALES Vda DE TOLEDO vs ANTONIO TOLEDO

[GR No. 149465. DECEMBER 8, 2003.]
YNARES-SANTIAGO
FACTS: Herein petitioner is the owner of a residential land with improvements thereon situated in
Poblacion, Danao City. On December 26, 1973, petitioner executed a Special Power of Attorney
authorizing her stepson Antonio Toledo to obtain a loan from a bank and mortgage the subject
property as security therefore. Pursuant to the above SPA, the spouses Antonio and Lelita Toledo
was able to obtain a loan from the Rural Bank of Carmen in the amount of P2,467.80 secured by a
real estate mortgage constituted on the subject property.
For failure of the Toledo spouses to pay the loan, the Bank extrajudicially foreclosed the
mortgage. The property was thereafter sold to the Bank as the highest bidder and wes issued a
certificate of sale upon satisfaction of the obligation so of the Toldeo spouses nt he amount of
P5,014.00, including interests, penalty, attorney’s fees and miscellaneous expenses.. The spouses
Toledo, however, failed to redeem the property which resulted in the consolidation of ownership in
the Bank.
The bank thereafter sold the said property on August 23, 1985 to private respondent
spouses Mauro and Oliva Sumulong. However, it appears that petitioner and the spouses Toledo
remained on the subject property.
On February 18, 1986, petitioner filed a complaint against private respondents for
Declaration of Nullity of Extrajudicial foreclosure of Mortgage and Sales, Reconveyance with
Damages. Petitioner alleged that private respondents connived with each other and by means of
fraud led her to execute the SPA. She also maintains that she made efforts to redeem the property
by deposition P5,200.00 with the Bank.
After trial on the merits, the court a quo found for petitioner and declared that the
extrajudicial proceedings of the subject property was a total nullity. On appeal, the CA, applying
the provisions of Sec. 3, ACT 3135 and Sec. 5, RA No. 720, reversed the decision of the lower court.
ISSUE: Was the CA correct in sustaining the validity of the auction sale?
HELD: NO. Section 3, Act 3135, as amended provides:

Notice shall be given by posting notices of sale for not less than twenty days in at least
three public places in the municipality where the property is situated, and if such property is worth
more than four hundred pesos, such notice shall be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the municipality or city.
(Sales and Lease),
Law)
118
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Corollary thereto, Section 5 of Republic Act No. 720 as amended by Republic Act No. 5939
18 reads:
The foreclosure of mortgages covering loans granted by rural banks shall be exempt from
the publication in newspapers where the total amount of the loan, including interests due and
unpaid, does not exceed three thousand pesos. It shall be sufficient publication in such cases if the
notices of foreclosure are posted in at least three of the most conspicuous public places in the
municipality and barrio where the land mortgaged is situated during the period of sixty days
immediately preceding the public auction. Proof of publication as required herein shall be
accomplished by affidavit of the sheriff or officer conducting the foreclosure sale and shall be
attached with the records of the case: . . . .
The foregoing provision, in exempting foreclosures by rural banks from the publication
requirement when the total amount of the loan including interests due and unpaid does not exceed
three thousand pesos (P3,000.00), clearly refers to the total amount of the loan along with
interests and not merely the balance thereof.
At the time of foreclosure in the case at bar, the total amount of petitioners' loan including
interests due and unpaid with the Bank was P4,652.80. Clearly, therefore, publication of notices of
auction sale in newspapers of general circulation in the city or municipality where the property is
situated was necessary.
Undisputedly, the Bank did not publish the notices of auction sale in a newspaper of
general circulation. It merely posted the notices of auction sale in three conspicuous places
including where the property was located. Considering that the auction sale of the subject property
to the Bank is void, no valid title passed in its favor. Consequently, the sale of the same property to
spouses Sumulong is also a nullity. Nemo dat quod non habet. One cannot give what one does not
have.
In Lucena and Parales v. Court of Appeals, Rural Bank of Naujan, et al., this Court ruled
that failure to comply with statutory requirements as to publication of notice of auction sale
constitutes a jurisdictional defect which invalidates the sale. Even slight deviations therefrom are
not allowed.
Mortgagor’s default does not operate to vest the mortgagee the ownership of the encumbered
property
CAROLINA RAMIREZ, ET.AL. vs COURT OF APPEALS

[GR No. 133841. AUGUST 15, 2003]
CARPIO-MORALES
FACTS: On December 29, 1965, private respondent spouses Loreto and Victoria Claravall executed a
deed of sale covering a parcel of land including improvements thereon situated in Ilagan, Isabela,
in favor of petitioner spouses Francisco and Carolina Ramirez. On the same date, another
instrument granting the spouses Claravall an option to repurchase the abovementioned property
was also executed. The Deed of Sale was registered by spouses Ramirez.
Private respondents were not able to redeem the property within the period given to
them. In their desire to recover the property, they filed a complaint against herein petitioners to
compel the latter to sell the property back to them.
After trial on the merits, the court a quo rendered a decision in favor of petitioners. The
CA affirmed the above decision. However, on review, the Supreme Court reversed the decision of
the Court of Appeals and declared that the Deed of Absolute Sale with the option to repurchase was
an equitable mortgage. The High Court then declared that private respondents were entitled to
redeem the property. After the aforesaid decision became final and executory, possession of the
disputed property was turned over to private respondents after they settled their obligation to
petitioners.
On November 21, 1994, private respondents filed a complaint against petitioners for
accounting and damages. In their answer, petitioners maintains that the complaint states no cause
of action since it was they who were entitled to the fruits of the property because prior to the
redemption thereof, the same was registered in their names.

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ISSUE: Were petitioners correct in maintaining that they were entitled to the fruits of the property
as owners thereof prior to the redemption of the same by respondents?
HELD: NO. The flaw in petitioners' argument stems from their submission that the spouses
Ramirez, as "vendees," were the owners of the property after it was registered in their names
following the execution of the deed of sale in their favor. The declaration, however, by this Court
in the first case that the deed of sale with option to repurchase entered into by the spouses
Ramirez and private respondents was an equitable mortgage necessarily takes the deed out of the
ambit of the law on sales and puts into operation the law on mortgage.
It is a well-established doctrine that the mortgagor's default does not operate to vest the
mortgagee the ownership of the encumbered property and the act of the mortgagee in registering
the mortgaged property in his own name upon the mortgagor's failure to redeem the property
amounts to pactum commissorium, a forfeiture clause declared by this Court as contrary to good
morals and public policy and, therefore, void. Before perfect title over a mortgaged property may
thus be secured by the mortgagee, he must, in case of non-payment of the debt, foreclose the
mortgage first and thereafter purchase the mortgaged property at the foreclosure sale.
In fine, the ownership of the property was not vested to the spouses Ramirez upon private
respondents' failure to pay their indebtedness, the registration of the property in the former's
names notwithstanding, absent any showing that they foreclosed the mortgage and purchased the
property at a foreclosure sale.
Issuance of a writ of possession in Extrajudicial Foreclosure Sales
CHAILEASE FINANCE CORP. vs. MA

[GR No. 151941, AUGUST 15, 2003]
YNARES-SANTIAGO
FACTS: The spouses Romeo and Mariafe Ma, respondents herein, obtained from Chinatrust
Commercial Banking Corp. a loan in the amount of P3,500,000.00. The loan was secured by a real
estate mortgage covering two parcels of land located in Brgy. Kay Biga, Paranaque City, owned by
respondents. For failure of respondents to settle their obligation, the mortgaged properties were
extrajudicially foreclosed, and was awarded to herein petitioners as the highest bidder in the
auction sale.
Respondents failed to redeem the property within the one year period which resulted in the
consolidation of the title to the properties in the name of herein petitioner. The latter
subsequently demanded that respondent spouses vacate the properties but the demand fell on deaf
ears. Petitioner was then constrained to file an ex parte petition for the issuance of the writ of
possession which was denied by the court a quo.
ISSUE: Was the court a quo correct in refusing to issue the writ of possession?
HELD: NO. A writ of possession is generally understood to be an order whereby the sheriff is
commanded to place a person in possession of a real or personal property, such as when a property
is extrajudicially foreclosed. In cases of extrajudicial foreclosure sales of real estate mortgage, the
issuance of a writ of possession is governed by Section 7 of Act No. 3135, which provides:
Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the
[Regional Trial Court] 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
(Sales and Lease),
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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 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.
The above provision explicitly authorizes the purchaser in a foreclosure sale to apply for a
writ of possession during the redemption period by filing an ex parte motion under oath for that
purpose in the corresponding registration or cadastral proceeding in the case of property with
Torrens title. Upon the filing of such motion and the approval of the corresponding bond, the law
also in express terms directs the court to issue the order for a writ of possession.
It has been consistently held that the issuance of a writ of possession is a ministerial
function. The order for a writ of possession issues as a matter of course upon the filing of the
proper motion and the approval of the corresponding bond. The court neither exercises its official
discretion nor judgment. If only to stress the writ's ministerial character, we have, in previous
cases, disallowed injunction to prohibit its issuance, just as we have held that issuance of the same
may not be stayed by a pending action for annulment of mortgage or the foreclosure itself.
A writ of possession may also be issued after consolidation of ownership of the property in
the name of the purchaser. 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 sale. As such, he is entitled to the possession of the 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. In such a case, the bond required in Section 7 of Act No. 3135 is no
longer necessary. 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.
In the case at bar, petitioner sufficiently established its right to the writ of possession.
More specifically, it presented as documentary exhibits the Certificate of Sale, the annotations
thereof at the back of respondents' titles, the Affidavit of Consolidation proving that respondents
failed to redeem the properties within the one-year redemption period, the titles issued in the
name of petitioner, and petitioner's demand on respondents to vacate the properties.
The trial court, however, denied the ex parte petition for the issuance of a writ of
possession on the ground of failure of petitioner to prove the existence of the loan, the execution
of the real estate mortgage and the fact of default of respondents. It ruled:
Petitioner did not present or offer as evidence the promissory note, real estate mortgage,
statement of account and demand letter. The said documents are deemed necessary as basis of the
unpaid claim and the foreclosure sale. But it is not clear whether said documents were executed at
all. Without them this Court is not fully convinced that the petition for writ of possession should be
granted.
This was error. The judge to whom an application for writ of possession is filed need not
look into the validity of the mortgage or the manner of its foreclosure. In the issuance of a writ of
possession, no discretion is left to the trial court. Any question regarding the cancellation of the
writ or in respect of the validity and regularity of the public sale should be determined in a
subsequent proceeding as outlined in Section 8 of Act No. 3135.
Until the foreclosure sale of the property in question is annulled by a court of competent
jurisdiction, the issuance of the writ of possession remains the ministerial duty of the trial court.
Hence, the trial court erred in denying the petition for issuance of writ of possession on the
grounds stated.
TORTS AND DAMAGES

Proper Exercise Of Rights pursuant to Article 19 NCC
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM vs ACT THEATER, INC.

[JUNE 17, 2004]
CALLEJO, SR.
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FACTS: On September 22, 1988, four employees of herein respondent were apprehended by
members of the Quezon City police for allegedly tampering a water meter in violation of PD No. 401
as amended by BP Blg. 876 and was charged accordingly in the proper court. As a consequence
thereof, herein petitioner cut off respondent’s water service connection a few hours after a notice
to that effect was sent to the latter.
Respondent filed a civil case for damages against petitioner alleging that the latter’s
arbitrary, whimsical, capricious act in cutting off its water supply without prior notice cause
adverse effect to the health and sanitation of its patrons.
After trial on the merits, the court a quo rendered a decision ordering petitioner to pay
respondent actual or compensatory damages. On appeal, the CA upheld the lower court’s decision
and justified the award of damages under Article 19 of the New Civil Code.
Petitioner, however, insists that it was merely exercising its proprietary rights under Article
429 of the New Civil Code when it cut of respondent’s water supply.
ISSUE: Was the Court of Appeals correct in awarding damages to respondent on the basis of Article
19 NCC?
HELD: YES. Article 429 of the Civil Code, relied upon by the petitioner in justifying its act of
disconnecting the water supply of the respondent without prior notice, reads:
Art. 429. The owner or lawful possessor of a thing has the right to exclude any person
from the enjoyment and disposal thereof. For this purpose, he may use such force as may
be reasonable to repel or prevent an actual or threatened unlawful physical invasion or
usurpation of his property.
A right is a power, privilege, or immunity guaranteed under a constitution, statute or
decisional law, or recognized as a result of long usage, constitutive of a legally enforceable claim
of one person against the other.
Concededly, the petitioner, as the owner of the utility providing water supply to certain
consumers including the respondent, had the right to exclude any person from the enjoyment and
disposal thereof. However, the exercise of rights is not without limitations. Having the right should
not be confused with the manner by which such right is to be exercised.
Article 19 of the Civil Code precisely sets the norms for the exercise of one's rights:
Art. 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.
When a right is exercised in a manner which discards these norms resulting in damage to
another, a legal wrong is committed for which actor can be held accountable. In this case, the
petitioner failed to act with justice and give the respondent what is due to it when the petitioner
unceremoniously cut off the respondent's water service connection. As correctly found by the
appellate court:
While it is true that MWSS had sent a notice of investigation to plaintiff-appellee prior to
the disconnection of the latter's water services, this was done only a few hours before the actual
disconnection. Upon receipt of the notice and in order to ascertain the matter, Act sent its
assistant manager Teodulo Gumalid, Jr. to the MWSS office but he was treated badly on the flimsy
excuse that he had no authority to represent Act. Act's water services were cut at midnight of the
day following the apprehension of the employees. Clearly, the plaintiff-appellee was denied due
process when it was deprived of the water services. As a consequence thereof, Act had to contract
another source to provide water for a number of days. Plaintiff-appellee was also compelled to
deposit with MWSS the sum of P200,000 for the restoration of their water services.
There is, thus, no reason to deviate from the uniform findings and conclusion of the court a
quo and the appellate court that the petitioner's act was arbitrary, injurious and prejudicial to the
respondent, justifying the award of damages under Article 19 of the Civil Code.
Reporters and editors are given much leeway and tolerance in the exercise of freedom of the
press

(Sales and Lease),
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CATALINO P. ARAFILES vs. PHILIPPINE JOURNALISTS, INC., ET. AL.

[G.R. No. 150256. March 25, 2004]
CARPIO-MORALES
FACTS: On April 14, 1987, while respondents Romy Morales, a reporter of People’s Journal Tonight
was at the Western Police District (WPD) Headquarters, an employee of National Institute of
Atmospheric Sciences (NIAS) by the name of Emelita Despuig filed a complaint against petitioner
Catalino Arafiles, a NIAS director for forcible abduction with attempted rape before the then on
duty Patrolman Benito Chio at the General Assignments Section of the headquarters.
In the presence of Morales, Emelita executed a sworn statement narrating the events
surrounding the reported offenses committed against her by the petitioner. Following the execution
by Emelita of her sworn statement, Patrolman Chio made an entry in the Police Blotter which was
perused by Morales.
For the purpose of reporting the same in the next issue of People’s Journal Tonight,
Morales personally interviewed Emelita. After the interview, he claimed that he tried to contact
Arafiles at the NIAS office to verify Emelita’s story but he failed because the office was already
closed. He then wrote an account about Emelita’s complaint and submitted it to his editor and on
that same day, April 14, 1987, Morales’ report appeared as headline on People’s Journal Tonight.
On April 13, 1988, petitioner instituted a complaint before the Regional Trial Court against
respondents for damages arising therefrom. In his complaint he alleged that on account of the
“grossly malicious and overly sensationalized reporting of the news item” prepared by respondent
Morales, edited by respondent Buan, Jr., allowed for publication by respondent Villareal, Jr., as
president of Philippine Journalists, Inc., and published by respondent Philippine Journalists, Inc.,
aspersions were cast on his character; his reputation as a director of the NIAS was injured; he
became the object of public contempt and ridicule as he was depicted as a sex-crazed stalker and
serial rapist; and the news item deferred his promotion to the position of Deputy Administrator of
PAGASA.
In their answer, respondents alleged that “the news item, having been sourced from the
Police Blotter which is an official public document and bolstered by a personal interview of the
victim is therefore privileged and falls within the protective constitutional provision of freedom of
the press.”
The trial court ruled in favor of the petitioner. The appellate court reversed the trial
court’s decision upon finding that herein petitioner “was not able to prove by a preponderance of
evidence that herein respondents were motivated by sinister intent to cause harm and injury to
herein petitioner.
ISSUE: Whether the CA erred in holding that the publication of the news item was not attended
with malice to thus free respondents of liability for damages.
HELD: NO. Art. 33. In cases of defamation, fraud, and physical injuries, a civil action for
damages, entirely separate and distinct from the criminal action, may be brought by the injured
party. Such civil action shall proceed independently of the criminal prosecution, shall require only
a preponderance of evidence.
Article 33 contemplates a civil action for the recovery of damages that is entirely unrelated
to the purely criminal aspect of the case. A civil action for libel under this article shall be
instituted and prosecuted to final judgment and proved by preponderance of evidence separately
from and entirely independent of the institution, pendency or result of the criminal action because
it is governed by the provisions of the New Civil Code and not by the Revised Penal Code governing
the criminal offense charged and the civil liability arising therefrom.
The pertinent provisions of the Civil Code, those found in the Chapter on Human Relations,
namely Articles 19 and 21, provide:
Art. 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.
Art. 21. Any person who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the damage.

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In actions for damages for libel, it is axiomatic that the published work alleged to contain
libelous material must be examined and viewed as a whole.
The article must be construed as an entirety including the headlines, as they may enlarge,
explain, or restrict or be enlarged, explained or strengthened or restricted by the context. Whether
or not it is libelous, depends upon the scope, spirit and motive of the publication taken in its
entirety.
A publication claimed to be defamatory must be read and construed in the sense in which
the readers to whom it is addressed would ordinarily understand it. So, the whole item, including
display lines, should be read and construed together, and its meaning and signification thus
determined.
In order to ascertain the meaning of a published article, the whole of the article must be
considered, each phrase must be construed in the light of the entire publication x x x The headlines
of a newspaper must also be read in connection with the language which follows.
The entry made by Patrolman Chio in the police blotter which respondent Morales
scrutinized at the WPD headquarters recorded indeed Emelita’s complaint about only a case for
abduction with rape which occurred on March 14, 1987. In her above-quoted sworn statement,
however, earlier given before the same Patrolman Chio in the presence of Morales who
subsequently interviewed her, Emelita reported about an abduction with rape incident which
occurred on March 14, 1987 and an abduction incident which occurred on April 13, 1987.
Petitioner’s anchoring of his complaint for damages on a charge of “malicious”
sensationalization of fabricated facts thus fails.
The presentation of the news item subject of petitioner’s complaint may have been in a
sensational manner, but it is not per se illegal.
In determining the manner in which a given event should be presented as a news item and
the importance to be attached thereto, newspapers must enjoy a certain degree of discretion.
Every citizen of course has the right to enjoy a good name and reputation, but we do not
consider that the respondents, under the circumstances of this case, had violated said right or
abused the freedom of the press. The newspapers should be given such leeway and tolerance as to
enable them to courageously and effectively perform their important role in our democracy. In the
preparation of stories, press reporters and [editors] usually have to race with their deadlines; and
consistently with good faith and reasonable care, they should not be held to account, to a point of
suppression, for honest mistakes or imperfection in the choice of words.
Culpa-Aquiliana; Application of the Doctrine of “Last Clear Chance”

CREDIT: Simple Loan
THE CONSOLIDATED BANK and TRUST CORPORATION vs. COURT OF APPEALS

[G.R. No. 138569. September 11, 2003.]
CARPIO
FACTS: The Consolidated Bank and Trust Corporation, now known as Solidbank is a domestic
banking corporation organized and existing under Philippine laws. Private respondent L.C. Diaz and
Company, CPA's ("L.C. Diaz"), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, herein private respondent opened a savings account with
petitioner and continued since then to be its depositor.
On August 14, 1991, private respondent, through its cashier Mercedes Macaraya instructed
its messenger Ismael Calapre to deposit money with petitioner and Allied Bank. The transaction
with petitioner however took time. As a consequence of which, Ismael Calapre proceeded to Allied
(Sales and Lease),
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Bank to deposit the amount intended for the said bank and leaving with Teller No. 6 of Solidbank
the passbook of private respondent. When Ismael returned to petitioner’s bank to retrieve the
passbook, he was informed by teller that somebody got it.
The following day, private respondent immediately called up petitioner to stop any
transaction using the lost passbook until the former has opened a new account. However, it was
also on the same day that respondent learned of the unauthorized withdrawal on the previous day
of P30,000.00 from its savings account.
On August 24, 1992, respondent, through its counsel, demanded from petitioner the return
of its money which was refused by the latter. Respondent thereafter filed a complaint against
petitioner for Recovery of a Sum of Money.
After trial, the court a quo rendered a decision absolving petitioner of any liability and
dismissed the complaint. In absolving petitioner, the court a quo applied the rules on savings
account written on the passbook which provided in part that "possession of this book shall raise the
presumption of ownership and any payment or payments made by the bank upon the production of
the said book and entry therein of the withdrawal shall have the same effect as if made to the
depositor personally."
Applying Art. 2176 NCC, the Court of Appeals reversed the decision of the lower court after
it found that petitioner’s negligence was the proximate cause of the unauthorized withdrawal of
P300,000.00 from the savings account of respondent. Furthermore, the CA ruled that while
respondent was likewise negligent, petitioner could not escape liability because of the doctrine of
“last clear chance”.
ISSUES:
1. Was Solidbank negligent and therefore, liable for breach of contract?
2. Is the doctrine of “last clear chance” applicable in the present action?
HELD: 1. YES. We hold that Solidbank is liable for breach of contract due to negligence, or culpa
contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil
Code on simple loan. Article 1980 of the Civil Code expressly provides that ". . . savings . . .
deposits of money in banks and similar institutions shall be governed by the provisions concerning
simple loan." There is a debtor-creditor relationship between the bank and its depositor. The bank
is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand. The savings deposit agreement between the bank and the
depositor is the contract that determines the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of banking. Section
2 of Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000, declares that the State
recognizes the "fiduciary nature of banking that requires high standards of integrity and
performance." This new provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court
of Appeals, holding that "the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
This fiduciary relationship means that the bank's obligation to observe "high standards of
integrity and performance" is deemed written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher
than that of a good father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and absent such stipulation
then the diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory
diligence required from banks — that banks must observe "high standards of integrity and
performance" in servicing their depositors. Although RA 8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C. Diaz's savings account, jurisprudence at the
time of the withdrawal already imposed on banks the same high standard of diligence required
under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not convert the
contract between the bank and its depositors from a simple loan to a trust agreement whether
express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not
a breach of trust. The law simply imposes on the bank a higher standard of integrity and
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performance in complying with its obligations under the contract of simple loan, beyond those
required of non-bank debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement
because banks do not accept deposits to enrich depositors but to earn money for themselves. The
law allows banks to offer the lowest possible interest rate to depositors while charging the highest
possible interest rate on their own borrowers. The interest spread or differential belongs to the
bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que
trust of banks, then the interest spread or income belongs to the depositors, a situation that
Congress certainly did not intend in enacting Section 2 of RA 8791.
Article 1172 of the Civil Code provides that "responsibility arising from negligence in the
performance of every kind of obligation is demandable." For breach of the savings deposit
agreement due to negligence, or culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the "transaction took time" and he had to
go to Allied Bank for another transaction. The passbook was still in the hands of the employees of
Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbank's rules on savings
account require that the "deposit book should be carefully guarded by the depositor and kept under
lock and key, if possible." When the passbook is in the possession of Solidbank's tellers during
withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in
safeguarding the passbook.
In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption
that the defendant was at fault or negligent. The burden is on the defendant to prove that he was
not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that
the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the authorized representative of
L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not
returning the passbook to Calapre. The burden was on Solidbank to prove that there was no
negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller
No. 6, the teller with whom Calapre left the passbook and who was supposed to return the
passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person
who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in
verifying the identity of the person retrieving the passbook, if there is such a procedure, and that
Teller No. 6 implemented this procedure in the present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat
superior or command responsibility. The defense of exercising the required diligence in the
selection and supervision of employees is not a complete defense in culpa contractual, unlike in
culpa aquiliana.
2. NO. The doctrine of last clear chance states that where both parties are negligent but
the negligent act of one is appreciably later than that of the other, or where it is impossible to
determine whose fault or negligence caused the loss, the one who had the last clear opportunity to
avoid the loss but failed to do so, is chargeable with the loss. Stated differently, the antecedent
negligence of the plaintiff does not preclude him from recovering damages caused by the
supervening negligence of the defendant, who had the last fair chance to prevent the impending
harm by the exercise of due diligence.
We do not apply the doctrine of last clear chance to the present case. Solidbank is liable
for breach of contract due to negligence in the performance of its contractual obligation to L.C.
Diaz. This is a case of culpa contractual, where neither the contributory negligence of the plaintiff
nor his last clear chance to avoid the loss, would exonerate the defendant from liability. Such
contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery
of damages by the plaintiff but does not exculpate the defendant from his breach of contract.
When actual damages proven by receipts amount to less than P25,000, the award of temperate
damages for php25,000.00 is justified; Formula in computing loss of earning capacity
(Sales and Lease),
Law)
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PEOPLE OF THE PHILIPPINE vs. BELONIO

[GR No. 148695. MAY 27, 2004.]
PER CURIAM
FACTS: An Information was filed charging herein accused-appellant Randy Belonio for the murder of
Ramy Tamayo to which the former pleaded not guilty. After trial on the merits, the court a quo
found accused-appellant guilty as charged after it appreciated the presence of treachery, evident
premeditation and recidivism, and sentenced him to death. The court a quo condemned accused-
appellant to pay the heirs of Randy Tamayo the following amounts: (1) The sum of P50,000 as death
indemnity; (2) the sum of P3,629.70 as reimbursement for hospital expenses; (3) the sum of
P940,716.00 as compensatory damages; and (4) the sum of P100,000.00 in favor of Jinky Tamayo as
moral damages.
The case was elevated to the Supreme Court for automatic review.
ISSUES:
1. Was the amount awarded as civil indemnity correct?
2. Was the amount awarded as loss of earning capacity correct?
3. Is temperate damages warranted in the case at bar?
HELD: 1. YES. The award by the court a quo of P50,000 as civil indemnity is in accordance with
jurisprudence. The amount of P25,000 as exemplary damages should also be given because of the
presence of the aggravating circumstance of recidivism.
2. NO. The court erred in awarding the amount of P940,716 as loss of earning capacity. In
“accordance with the formula adopted by the Court in Villa Rey Transit, Inc. vs. CA (31 SCRA 511
[1970]), and using the American Expectancy Table of Mortality," the loss of Tamayo’s earning
capacity is to be computed as follows:
Net earning capacity = Life expectancy x (Gross Annual Income – Living Expenses)
where: Life expectancy = 2/3 (80 – the age of the deceased)
= 2/3 (80-24) x [(P200x365)- P36,500]
= P1,362,545
The award for loss of earning capacity should therefore be P1,362,545.
There being testimonial evidence in support of moral damages, an award for it is proper.
However, it should be reduced to the more reasonable amount of P50,000 considering that it is not
meant to enrich an injured party.
3. YES. Actual damages for the hospital expenses in the amount of P3,627.70 were duly
supported by receipts. However instead of awarding actual damages, we grant temperate damages
in accordance with People vs. Andres, where the Court said:
"[W]e declared in the case of People vs. Villanueva that:
'. . . when actual damages proven by receipts during the trial amount to less than P25,000, as in
this case, the award of temperate damages for P25,000 is justified in lieu of actual damages of a
lesser amount. Conversely, if the amount of actual damages proven exceeds P25,000, then
temperate damages may no longer be awarded; actual damages based on the receipts presented
during trial should instead be granted.'
"The victim’s heirs should, thus, be awarded temperate damages in the amount of P25,000."
Presumption of Negligence
ERNESTO PLEYTO and PHILIPPINE RABBIT BUS LINES vs. MARIA D. LOMBOY, ET AL.
[G.R. NO. 148737, JUNE 16, 2004.]
QUISUMBING
FACTS: At approximately 11:30 a.m. of May 16, 1995, petitioner Philippine Rabbit Bus Lines, Inc.
(PRBL) Bus No. 1539 driven by petitioner Pleyto, was traveling along MacArthur Highway in Gerona,
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Tarlac bound for Vigan, Ilocos Sur. It was drizzling that morning and the Macadam road was wet.
Right in front of the bus, headed north, was the tricycle owned and driven by one Rodolfo Esguerra.
Pleyto tried to overtake Esguerra’s tricycle but hit it instead. Pleyto then swerved into the left
opposite lane. Coming down the lane, some fifty meters away, was a southbound Mitsubishi Lancer
car driven by Arnulfo Asuncion. The car was headed for Manila with some passengers. Seated
beside Arnulfo was his brother-in-law, Ricardo Lomboy, while in the back seat were Ricardo’s 18-
year old daughter Carmela and her friend, one Rhino Daba. PRBL Bus No. 1539 smashed head-on
the car, killing Arnulfo and Ricardo instantly. Carmela and Rhino suffered injuries, but only
Carmela required hospitalization.
On November 29, 1995, herein respondents, as pauper-litigants, filed an action for damages
against PRBL and its driver. In their complaint, the Lomboys prayed that they be indemnified for
the untimely death of Ricardo Lomboy, his lost earnings, the medical and hospitalization expenses
of Carmela, and moral damages.
On June 26, 1998, the trial court, after finding that Pleyto was negligent, ruled in favor of
the plaintiffs, ordering the defendants to pay solidarily the former the following amounts: 1)
P50,000.00 as indemnification for the death of Ricardo Lomboy; 2)P1,642,521.00 for lost earnings
of Ricardo Lomboy; 3) P59,550.00 as actual damages for the funeral, wake, religious services and
prayer for the soul of the departed; 4) P52,000.00 for the medical treatment and medicine of
Carmela Lomboy; 5) P500,000.00 as moral damages for the wife and children excluding Carmela
Lomboy; 6) P50,000.00 as moral damages for Carmela Lomboy. The liability of PRBL was grounded
on Article 2180 of the New Civil Code for its failure to observe the required diligence in its
supervision of its employees. On appeal, the CA affirmed the decision of the trial court with the
modification that the award for actual damages is reduced to P39,550.00 for funeral and religious
services and P27,000.00 for medical expenses of Carmela Lomboy; and the award for loss of earning
capacity is accordingly corrected to P1,152,000.00.
ISSUES:
1. Was the appellant driver negligent?
2. Was the CA correct in holding PRBL solidarily liable?
3. Was the CA was correct in computing the amount of the victim’s earning capacity?
4. Was the CA was correct in reducing the amount of actual damages?
5. Was the amount of moral damages correctly awarded?
HELD: 1. YES. The negligence and fault of appellant driver is manifest. He overtook the tricycle
despite the oncoming car only fifty (50) meters away from him. Defendant-appellant’s claim that
he was driving at a mere 30 to 35 kilometers per hour does not deserve credence as it would have
been easy to stop or properly maneuver the bus at this speed. The speed of the bus, the drizzle
that made the road slippery, and the proximity of the car coming from the opposite direction were
duly established by the evidence. The speed at which the bus traveled, inappropriate in the light of
the aforementioned circumstances, is evident from the fact despite the application of the brakes,
the bus still bumped the tricycle, and then proceeded to collide with the incoming car with such
force that the car was pushed beyond the edge of the road to the rice field.
Indeed, petitioner Pleyto violated traffic rules and regulations when he overtook the
tricycle despite the presence of an oncoming car in the other lane. Article 2185 of the Civil Code
lays down the presumption that a person driving a motor vehicle has been negligent if at the time
of the mishap, he was violating any traffic regulation. As found by both the Court of Appeals and
the trial court, petitioners failed to present any convincing proof rebutting such presumption.
A driver abandoning his proper lane for the purpose of overtaking another vehicle in an
ordinary situation has the duty to see to it that the road is clear and not to proceed if he cannot do
so in safety. When a motor vehicle is approaching or rounding a curve, there is special necessity for
keeping to the right side of the road and the driver does not have the right to drive on the left
hand side relying upon having time to turn to the right if a car approaching from the opposite
direction comes into view.

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2. YES. The Court of Appeals found PRBL liable for Pleyto’s negligence pursuant to Article
2180 in relation to Article 2176 of the Civil Code. Under Article 2180, when an injury is caused by
the negligence of a servant or an employee, the master or employer is presumed to be negligent
either in the selection or in the supervision of that employee. This presumption may be overcome
only by satisfactorily showing that the employer exercised the care and the diligence of a good
father of a family in the selection and the supervision of its employee.
In fine, when the employee causes damage due to his own negligence while performing his
own duties, there arises the juris tantum presumption that the employer is negligent, rebuttable
only by proof of observance of the diligence of a good father of a family. Thus, in the selection of
prospective employees, employers are required to examine them as to their qualifications,
experience and service records. With respect to the supervision of employees, employers must
formulate standard operating procedures, monitor their implementation and impose disciplinary
measures for breaches thereof. These facts must be shown by concrete proof, including
documentary evidence.
In the present case, petitioners presented several documents in evidence to show the
various tests and pre-qualification requirements imposed upon petitioner Pleyto before his hiring as
a driver by PRBL. However, no documentary evidence was presented to prove that petitioner PRBL
exercised due diligence in the supervision of its employees, including Pleyto.
3. YES. In considering the earning capacity of the victim as an element of damages, the
net earnings, which is computed by deducting necessary expenses from the gross earnings, and not
the gross earnings, is to be utilized in the computation. Note that in the present case, both the
Court of Appeals and the trial court used net earnings, not gross earnings in computing loss of
earning capacity. The amount of net earnings was arrived at after deducting the necessary
expenses (pegged at 50% of gross income) from the gross annual income. This computation is in
accord with settled jurisprudence, including the Villa Rey case.
It is well-settled in jurisprudence that the factors that should be taken into account in
determining the compensable amount of lost earnings are: (1) the number of years for which the
victim would otherwise have lived; and (2) the rate of loss sustained by the heirs of the deceased.
Jurisprudence provides that the first factor, i.e., life expectancy, is computed by applying the
formula (2/3 x [80 – age at death]) adopted in the American Expectancy Table of Mortality or the
Actuarial Combined Experience Table of Mortality. As to the second factor, it is computed by
multiplying the life expectancy by the net earnings of the deceased, i.e., the total earnings less
expenses necessary in the creation of such earnings or income and less living and other incidental
expenses. The net earning is ordinarily computed at fifty percent (50%) of the gross earnings. 24
Thus, the formula used by this Court in computing loss of earning capacity is: Net Earning Capacity
= [2/3 x (80 – age at time of death) x (gross annual income – reasonable and necessary living
expenses)].
It was established that Ricardo Lomboy was 44 years old at the time of his death and is
earning a monthly income of P8,000 or a gross annual income (GAI) of P96,000. Using the cited
formula, the Court of Appeals correctly computed the Loss of Net Earning Capacity as P1,152,000,
net of and after considering a reasonable and necessary living expenses of 50% of the gross annual
income or P48,000. A detailed computation is as follows:
NET = LIFE EXPECTANCY x GROSS - LIVING

EARNING [2/3 (80-age at the time ANNUAL EXPENSES
CAPACITY (X) of death) INCOME (GAI) (50% of GAI)
X = [2/3 (80-44)] x [P96,000 – (50% x P96,000)
X = [2/3 (36)] x [P96,000 – 48,000]
X = 24 x 48,000
X = P1,152,000.00
==========
Thus, no reversible error may be attributed to the court a quo in fixing the loss of earning capacity
at said amount.

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4. YES. We likewise sustain the reduction of the award of actual damages from P59,550 for
funeral and burial expenses of Ricardo and P52,000 for medical expenses of Carmela Lomboy to
P39,550 and P27,000, respectively, as only these latter amounts were duly supported by receipts.
To justify an award of actual damages, there must be competent proof of the actual amount of
loss, credence can be given only to claims which are duly supported by receipts.
5. NO. However, while the award of P50,000 as moral damages to Carmela Lomboy is
sustained, the award for moral damages of P500,000 to the heirs of Ricardo Lomboy should be
reduced for being excessive.
Under Article 2206 of the Civil Code, the spouse, legitimate children and illegitimate
descendants and ascendants of the deceased may demand moral damages for mental anguish by
reason of the death of the deceased. However, we must stress that moral damages, though
incapable of pecuniary estimation, are in the category of an award designed to compensate the
claimant for actual injury and are not meant to enrich complainant at the expense of defendant.
Moral damages are awarded to enable the injured party to obtain means, diversions or amusements
that will serve to alleviate the moral suffering he/she has undergone, by reason of the defendant’s
culpable action. Its award is aimed at restoration, as much as possible, of the spiritual status quo
ante; thus it must be proportionate to the suffering inflicted. Under the circumstances of this case,
an award of P100,000 to the heirs of Ricardo Lomboy would be justified and in keeping with the
purpose of the law and jurisprudence in allowing moral damages.
Formula in Computating Loss of Earning Capacity
ENDREO MAGBANUA, ET AL. vs. JOSE TABUSARES, JR., ET AL.

[G.R. No. 152134 June 4, 2004.]
PUNO
FACTS: A Ceres Liner Bus No. 154, driven by Endreo Magbanua and owned and operated by Vallacar
Transit, Inc., and an Amante Type Jeepney, driven by Felipe Palacios and owned by Salvador
Algara, Sr. figured in an accident along the national road at Sipalay, Negros Occidental after the
Ceres Bus, in an attempt by its driver to overtake the the overloaded jeepney, bumped the rear of
the latter. One of those who were killed was Jury Tabusares, son of herein private respondents, 27
years of age, single, an employee of the Maricalum Copper Mines as Oiler 2B and was then receiving
P1,256.00 monthly salary plus P510.00 cost of living allowance (COLA) or a total monthly income of
P1,766.00.
After trial on the merits, the trial court found that herein petitioners were all negligent,
and accordingly held them liable solidarily for damages to private respondents. Among the award
granted by the court a quo was the loss of earning capacity in the amount of P699,336.00.
On appeal, the Court of Appeals rendered its decision affirming the factual findings of the
trial court, but modifying the award of damages, specifically reducing the amount of lost earning to
P374,392.00 pursuant to the formula used by the SC in People vs Lopez.
Petitioners, while accepting the factual findings of the trial court and the appellate court, now
assail the latter's computation of the award of damages for loss of earning capacity. They contend
that there are varying computations used in the decisions of this Court. In People vs. Lopez, the
Court applied the following formula: 2/3 x (80-27) x P21,192.00 – 50%. However, the following
formula was employed in People vs. Muyco, et al.:2/3 x (80 – 27) x P21,192.00 – 80%. The
difference lies in the computation of the net income of the victim. In the Lopez case, net income
was derived by deducting 50% of the gross annual income, while in the Muyco case, the amount
deducted was 80% of the gross annual income. The Court of Appeals followed the computation in
People vs. Lopez as it was "the prevailing case law at the time of the decision appealed from was
promulgated and unmistakably more favorable to the heirs of the deceased." Petitioners argue that
the instant case was decided by the Court of Appeals one year and six months after the
promulgation of People vs. Muyco, therefore, the Court should apply the computation in the latter
case.
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On the other hand, the respondents, in their comment, cite other cases decided after the
Muyco case where the Court applied the formula in the Lopez case. They submit that the
computation in People vs. Lopez should be applied in this case.
ISSUE: Was the computation employed by the SC in People vs Lopez applicable in the present case?
HELD: YES. Article 2205 of the New Civil Code allows the recovery of damages for "loss or
impairment of earning capacity in cases of temporary or permanent personal injury." Such damages
covers the loss sustained by the dependents or heirs of the deceased, consisting of the support they
would have received from him had he not died because of the negligent act of another. The loss is
not equivalent to the entire earnings of the deceased, but only that portion that he would have
used to support his dependents or heirs. Hence, we deduct from his gross earnings the necessary
expenses supposed to be used by the deceased for his own needs. The Court explained in Villa Rey
Transit, Inc. vs. Court of Appeals that: “the award of damages for loss of earning capacity is
concerned with the determination of the losses or damages sustained by the private respondents,
as dependents and intestate heirs of the deceased, and that said damages consist, not of the full
amount of his earnings, but of the support they received or would have received from him had he
not died in consequence of the negligence of petitioner's agent. In fixing the amount of that
support, we must reckon with the 'necessary expenses of his own living', which should be deducted
from his earnings. Thus, it has been consistently held that earning capacity, as an element of
damages to one's estate for his death by wrongful act is necessarily his net earning capacity or his
capacity to acquire money, 'less the necessary expense for his own living.' Stated otherwise, the
amount recoverable is not loss of the entire earning, but rather the loss of that portion of the
earnings which the beneficiary would have received. In other words, only net earnings, not gross
earning are to be considered that is, the total of the earnings less expenses necessary in the
creation of such earnings or income and less living and other incidental expenses.
Aside from the loss sustained by the heirs of the deceased, another factor considered in
determining the award of loss of earning capacity is the life expectancy of the deceased which
takes into account his work, lifestyle, age and state of health prior to the accident.
Thus, the formula for the computation of unearned income is:
NET LIFE GROSS LIVING
EARNING = EXPECTANCY X ANNUAL LESS EXPENSES
CAPACITY INCOME
Life expectancy is determined in accordance with the formula:

2/3 x [80 – age of deceased]
The bone of contention in this case is the amount of living expenses that should be
deducted from the deceased's gross annual income — whether 50% or 80%.
A survey of more recent jurisprudence shows that the Court consistently pegged the
amount at 50% of the gross annual income. We held in Smith Bell Dodwell Shipping Agency Corp. vs.
Borja that when there is no showing that the living expenses constituted a smaller percentage of
the gross income, we fix the living expenses at half of the gross income, thus: “In other words, only
net earnings, not gross earnings, are to be considered; that is, the total of the earnings less
expenses necessary in the creation of such earnings or income, less living and other incidental
expenses. When there is no showing that the living expenses constituted a smaller percentage of
the gross income, we fix the living expenses at half of the gross income. To hold that one would
have used only a small part of the income, with the larger part going to the support of one's
children, would be conjectural and unreasonable.
There is no evidence in the case at bar whether the living expenses of the victim, Jury
Tabusares, constituted a bigger or smaller percentage of his gross income. In such case, it is fair to
assume that it is 50% of his gross annual income. Hence, we find that the Court of Appeals did not
err in its computation of the award of loss of unearned income to petitioner.
Award of Actual, Moral and Exemplary Damages

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PEOPLE OF THE PHILIPPINES vs. MICHAEL SIMON, ET. AL.

[G.R. No. 130531. May 27, 2004.]
SANDOVAL-GUTIERREZ
FACTS: At around 12:30 a.m. on February 19, 1994, Lenita Dominguez and her daughter were about
to go home at the BCL Homes Compound in Valenzuela, Metro Manila when one of the accused,
Froilan Reyes, prevented them from entering the gate. He gave her a “tip” that SPO4 Loreto
Rodriguez Despite the warning, Dominguez and her daughter proceeded to enter the gate into her
place. When they reached the store in front of her place, she saw appellant Michael Simon together
with other men who were engaged in a drinking spree. Suddenly, to her surprise, SPO4 Rodriguez
shot the victim, Angelito Maniaol alias “Marlo” with a .45 caliber gun, which made the victim run
towards the house of his girlfriend, Nida Espital. The group of men engaged in the drinking spree
followed the victim and forced him back to the place where they were drinking, with several of
them holding the victim down and burning him with cigarette butts. Thereafter, the victim was
strangled with an “alambre” after he was burned and was brought inside the garage, weak and
bloodied from the beating.
When the victim’s girlfriend, Nida Espital, heard of the incident, she immediately
proceeded to rush over the scene of the crime, but was prevented by Reyes. Despite his efforts
however, she was still able to get inside the compound. At the time, SPO4 Rodriguez and the group
of men were about to transport the body inside a Nissan Sentra and transport it outside the garage
of one Crispin Bajado, but was prevented by the victim’s girlfriend, who already saw her
boyfriend’s dead body which was badly beaten. Celedonio Espital, Nida’s brother, who was also
present at the time of the incident, instructed his brother to inform the victim’s mother of the
incident. When the victim’s mother arrived, the police investigators also arrived and conducted an
investigation. An autopsy conducted on the victim’s body showed the gunshot wound, as well as the
lacerations and hemorrhages suffered as a result of the brutal beating done by Rodriguez and the
group of men. The mother’s victim spent P70,750.00 for the wake and burial of her son as shown by
a list of expenses (Exhibit "Q"). She and her family suffered "mental anguish and shock" that cannot
be quantified in terms of money.
Appellants were then charged with the crime of murder of Angelito Maniaol alias “Marlo”,
and were convicted on the basis of the evidence of the prosecution including eyewitness
testimonies of Dominguez and Espital, among others, and the autopsy report conducted on the body
outlining the various injuries the victim suffered as a result of the group’s brutality. The trial court
convicted the appellants of the crime of murder and sentenced them to the death penalty. Further,
both the Accused Michael Simon and Froilan Reyes y Lacson @ Olan were further sentenced to pay
the victim’s family the amount of P70,500 as actual damages, P50,000 as indemnity for the death
of Angelito Maniaol and the amount of P250,000 as moral damages, plus the cost of suit. Appellants
thus questioned the judgment rendered by the trial court, arguing that the evidence presented by
the prosecution were highly doubtful and exaggerated and that the defense’s evidence were
clearer and more convincing, and thus does not warrant a conviction nor the awarding of damages.
ISSUE: Was the award of actual and moral damages as civil indemnity justified?
HELD: YES. In line with the current jurisprudence, the heirs of the victim are entitled to the
amount of P50,000.00 by way of civil indemnity ex delicto. As regards the actual damages, it
appears that out of the P70,750.00 awarded by the trial court, only P40,000.00 was actually
supported by receipts. The other amounts were based solely on a prepared list. To be entitled to
actual damages, it is necessary to prove the actual amount of loss with a reasonable degree of
certainty, premised upon competent proof and on the best evidence obtainable to the injured
party. Here, the prosecution failed to present receipts for the other expenses incurred. Thus, we
reduce the amount of actual damages awarded by the trial court to P40,000.00 only.
We affirm the award of moral damages, there being proof that the victim's mother and her
family suffered wounded feeling, mental anguish and similar injury. However, we reduce the award
to P50,000.00.Verily, moral damages are not intended to enrich the victim's heirs; rather they are

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awarded to allow them to obtain means for diversion that could serve to alleviate their moral and
psychological suffering.
We also award the victim's heirs P25,000.00 as exemplary damages. This is pursuant to our
ruling in People vs. Catubig that if a crime is committed with an aggravating circumstance, either
qualifying or generic, an award of P25,000.00 as exemplary damages is justified.
Awarding Of Actual, Moral, Exemplary and Compensatory Damages

Agency: Doctrine of Apparent Authority
PREMIERE DEVELOPMENT BANK vs. COURT OF APPEALS

[G.R. No. 159352. April 14, 2004.]
YNARES-SANTIAGO
FACTS: In October 1994, herein respondent Panacor Marketing Corporation (Panacor), acquired an
exclusive distributorship agreement with Colgate-Palmolive Philippines, Inc. (Colgate) to sell its
products. The exclusive distributorship agreement however, required that Panacor have an
inventory level of 7.5 million. To meet such requirement, Panacor applied for a P4.1 million loan
with Premiere Development Bank (Premiere), but the latter rejected the application. Instead, it
suggested that Panacor’s affiliate company, respondent Arizona Transport Corporation (Arizona), an
existing loan client of the bank, apply for the loan; with the condition that the proceeds thereof
shall be made available to Panacor. Eventually, Panacor was granted a P4.1 million credit line
agreement. Thereafter, Arizona applied for a P6.1 million loan, proceeds of which would be made
available to Panacor. However, when the bank approved the loan, the proceeds were divided in
such a way that P3.4 million of which would be granted to Arizona to pay off its existing
obligations, while the remaining P2.7 million served as Panacor’s credit line. The loan was secured
by a real estate mortgage over a parcel of land signed by Arizona’s officers.
Since the P2.7 million credit line of Panacor was insufficient to meet the capital
requirements needed for the distributorship agreement, it decided to apply for a loan with another
bank, Iba-Finance Corporation (Iba-Finance) worth P10 million, P7.5 of which would be released as
payment for the first loan, while the remaining P2.5 million would be released to Panacor after
Premiere orders the cancellation of the real estate mortgage over the earlier loan and turns over
the title to Iba-Finance, referred to as the take-out agreement.
Eventually, Iba-Finance released P6.2 million representing the total balance of Arizona’s
obligations to Premiere, with the request that the real estate mortgage issued over the first loan
be cancelled upon payment of the said amount. Premiere, despite full payment by Iba-Finance of
the loan, refused to cancel the real estate mortgage issued. When Panacor requested for the
release of the remaining P2.5 million from Iba-Finance, the latter refused, stating that Premiere
had not complied with its obligation of canceling the real estate mortgage. As a result thereof,
Panacor was unable to meet the capital requirements of the exclusive distributorship agreement
and Colgate subsequently terminated the said agreement.
On March 13, 1996, Panacor filed a complaint for specific performance and damages against
Premiere Bank. Iba-Finance filed a complaint-in-intervention praying that Premiere Bank pay
damages in its favor. The trial court ruled in favor of Panacor and Iba-Finance, ordering Premiere
Bank to pay both entities damages as well as ordering Premiere to cancel the real estate mortgage
and deliver the title to Iba-Finance. Premiere Bank appealed the said decision, arguing that it did
not exercise bad faith in downgrading Panacor’s credit line to warrant an award of moral damages,
that there was no basis in awarding the amount of P4.5 million in actual damages. Meanwhile,
Premiere entered into a compromise agreement with Iba-Finance by agreeing to return the amount
Iba-Finance forwarded to Premiere as payment for Arizona’s loans.
ISSUES:
1. Is the award of exemplary damages justified on the ground that Premier Bank acted in
bad faith when it downgraded the amount stated in Panacor’s credit line agreement?
2. Did Premiere Bank’s officer-in-charge, Ms. Arlene Martillano had the authority to
execute the Credit Line Agreement which would sanction its validity?

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3. Was there sufficient evidence presented to warrant the awarding of actual damages in
the amount of P4,520,000.00.
HELD: 1. YES. Under the Credit Line Agreement dated September 1995, Premiere Bank agreed to
extend a loan of P4.1 million to Arizona to be used by its affiliate, Panacor, in its operations.
Eventually, Premiere approved in favor of Arizona a loan equivalent to P6.1 million, P3.4 million of
which was allotted for the payment of Arizona’s existing loan obligations and P2.7 million as credit
line of Panacor. Since only P2.7 million was made available to Panacor, instead of P4.1 million as
previously approved, Panacor applied for a P2.5 loan from Iba-Finance, which, as earlier
mentioned, was not released because of Premiere Bank’s refusal to issue the mortgage
cancellation.
It is clear that Premiere Bank deviated from the terms of the credit line agreement when it
unilaterally and arbitrarily downgraded the credit line of Panacor from P4.1 million to P2.7 million.
Having entered into a well-defined contractual relationship, it is imperative that the parties should
honor and adhere to their respective rights and obligations thereunder. Law and jurisprudence
dictate that obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. The appellate court correctly observed, and we
agree, that:
“Appellant’s actuations, considering the actual knowledge of its officers of the tight
financial situation of appellee PANACOR brought about primarily by the appellant bank’s
considerable reduction of the credit line portion of the loan, in relation to the “bail-out” efforts of
IBA Finance, whose payment of the outstanding loan account of appellee ARIZONA with appellant
was readily accepted by the appellant, were truly marked by bad faith and lack of due regard to
the urgency of its compliance by immediately releasing the mortgage cancellation document and
delivery of the title to IBA Finance. That time is of the essence in the requested release of the
mortgage cancellation and delivery of the subject title was only too well-known to appellant,
having only belatedly invoked the cross-default provision in the Real Estate Mortgage executed in
its favor by appellee ARIZONA to resist the plain valid and just demand of IBA Finance for such
compliance by appellant bank.”
Premiere Bank cannot justify its arbitrary act of downgrading the credit line on the alleged
finding by its project analyst that the distributorship was not financially feasible. Notwithstanding
the alleged forewarning, Premiere Bank still extended Arizona the loan of P6.1 million, albeit in
contravention of the credit line agreement. This indubitably indicates that Premiere Bank had
deliberately and voluntarily granted the said loan despite its claim that the distributorship contract
was not viable.
Neither can Premiere Bank rely on the puerile excuse that it was the bank’s policy not to
release the mortgage cancellation prior to the settlement of outstanding loan obligations. Needless
to say, the Final Statement of Account dated October 17, 1995 showing in no uncertain terms
Arizona’s outstanding indebtedness, which was subsequently paid by Iba-Finance, was the full
payment of Arizona’s loan obligations. Equity demands that a party cannot disown it previous
declaration to the prejudice of the other party who relied reasonably and justifiably on such
declaration.
2. YES. As found by the lower court, there are sufficient indicia that demonstrate that the
alleged unjust pressure exerted on Martillano was more imagined than real. In her testimony,
Martillano claims that she was persuaded and coaxed by Caday of Iba-Finance and Panaligan of
Panacor to sign the letter. It was she who provided Iba-Finance with the Final Statement of Account
and accepted its payment without objection or qualification. These acts show that she was vested
by Premiere Bank with sufficient authority to enter into the said transactions.
If a private corporation intentionally or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that the apparent
authority is real as to innocent third persons dealing in good faith with such officers or agents. As
testified to by Martillano, after she received a copy of the credit line agreement and affixed her
signature in conformity thereto, she forwarded the same to the legal department of the Bank at its
Head Office. Despite its knowledge, Premiere Bank failed to disaffirm the contract. When the
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officers or agents of a corporation exceed their powers in entering into contracts or doing other
acts, the corporation, when it has knowledge thereof, must promptly disaffirm the contract or act
and allow the other party or third persons to act in the belief that it was authorized or has been
ratified. If it acquiesces, with knowledge of the facts, or fails to disaffirm, ratification will be
implied or else it will be estopped to deny ratification.
3. YES. To justify an award for actual damages, there must be competent proof of the
actual amount of loss. Credence can be given only to claims, which are duly supported by receipts.
The burden of proof is on the party who will be defeated if no evidence is presented on either side.
He must establish his case by a preponderance of evidence which means that the evidence, as a
whole, adduced by one side is superior to that of the other. In other words, damages cannot be
presumed and courts, in making an award, must point out specific facts that can afford a basis for
measuring whatever compensatory or actual damages are borne.
Under Article 2199 of the Civil Code, actual or compensatory damages are those awarded in
satisfaction of, or in recompense for, loss or injury sustained. They proceed from a sense of natural
justice and are designed to repair the wrong that has been done, to compensate for the injury
inflicted and not to impose a penalty.
In the instant case, the actual damages were proven through the sole testimony of
Themistocles Ruguero, the vice president for administration of Panacor. In his testimony, the
witness affirmed that Panacor incurred losses, specifically, in terms of training and seminars,
leasehold acquisition, procurement of vehicles and office equipment without, however, adducing
receipts to substantiate the same. The documentary evidence marked as exhibit “W”, which was an
ordinary private writing allegedly itemizing the capital expenditures and losses from the failed
operation of Panacor, was not testified to by any witness to ascertain the veracity of its contents.
Although the lower court fixed the sum of P4,520,000.00 as the total expenditures incurred by
Panacor, it failed to show how and in what manner the same were substantiated by the claimant
with reasonable certainty. Hence, the claim for actual damages should be admitted with extreme
caution since it is only based on bare assertion without support from independent evidence.
Premiere’s failure to prove actual expenditure consequently conduces to a failure of its claim. In
determining actual damages, the court cannot rely on mere assertions, speculations, conjectures or
guesswork but must depend on competent proof and on the best evidence obtainable regarding the
actual amount of loss.
Even if not recoverable as compensatory damages, Panacor may still be awarded damages
in the concept of temperate or moderate damages. When the court finds that some pecuniary loss
has been suffered but the amount cannot, from the nature of the case, be proved with certainty,
temperate damages may be recovered. Temperate damages may be allowed in cases where from
the nature of the case, definite proof of pecuniary loss cannot be adduced, although the court is
convinced that the aggrieved party suffered some pecuniary loss.
It is obvious that the wrongful acts of Premiere Bank adversely affected, in one way or
another, the commercial credit of Panacor, greatly contributed to, if not, decisively caused the
premature stoppage of its business operations and the consequent loss of business opportunity.
Since these losses are not susceptible to pecuniary estimation, temperate damages may be
awarded.
Article 2216 of the Civil Code: No proof of pecuniary loss is necessary in order that moral,
nominal, temperate, liquidated or exemplary damages may be adjudicated. The assessment of such
damages, except liquidated ones, is left to the discretion of the Court, according to the
circumstances of each case.
Under the circumstances, the sum of P200,000.00 as temperate damages is reasonable.
When Award of Actual Damages not proper
PEOPLE OF THE PHILIPPINES vs. JESUS MORILES, JR., y QUEBEC

[G.R. No. 153248. March 25, 2004.]

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QUISUMBING
FACTS: On March 12, 1994, a benefit dance was held in Capoocan, Leyte from 9:00 p.m – 1:00 a.m.
It was attended by the victim, Gary Basco, appellant Jesus Moriles and prosecution eyewitness
Francisco Dadis, Jr., among others. The victim went to Capoocan to court a certain Dayluz Octavio,
who was a native therein, and was the person they visited right after the dance ended at 1:00 a.m.
After Basco and Dadis left Octavio’s house at around 2:00 a.m. on March 13, 1994, they were
walking beside the river when, without warning, appellant suddenly appeared from behind and
stabbed the victim once in the chest with a bolo
When the police conducted the investigation, the autopsy report yielded that the cause of
death was severe hemorrhage due to a stab wound in the chest. Appellant was then charged with
the crime of murder, and was convicted by the trial court to suffer the death penalty. Appellant
was further ordered to indemnify the heirs of Gary Basco the amount of Seventy Five Thousand
(P75,000.00) Pesos, pay actual damages in the amount of Nineteen Thousand (P19,000.00) Pesos
and moral damages in the amount of Fifty (P50,000.00) Thousand Pesos and pay the Cost.
Appellant, in the present automatic review alleges, among others, that the trial court erred in
awarding actual damages.
ISSUE: Was the trial court justified in awarding actual damages to the victim’s family?
HELD: NO. As a rule, claims for actual damages must be supported by evidence. In this case, no
receipts were offered to support the funeral expenses claimed by the victim’s family. Hence, the
award of P19,000.00 in actual damages must be stricken for lack of proof. However, considering
that the victim’s heirs did incur funeral and other expenses because of his death, the award of
temperate damages in the amount of P25,000.00 would be justified. Lastly, concerning the award
of civil indemnity, the amount thereof should be reduced to P50,000.00, in line with prevailing case
law.
Negligence giving rise to action for damages; Solidary liability of employer for quasi- delict
committed by employees
DELSAN TRSANSPORT LINES, INC., vs. C&A CONSTRUCTION, INC.,

[G.R. No. 156034, October 1, 2003.]
YNARES- SANTIAGO
FACTS: Respondent C & A Construction, Inc., was engaged by the National Housing Authority to
construct a deflector wall at the Vitas Reclamation Area in Tondo, Manila. On October 9, 1994, M/V
Delsan Express, a ship owned and operated by petitioner Delsan Transport Lines, Inc., anchored at
the Navotas Fish Port for the purpose of installing a cargo pump and clearing the cargo oil tank. At
around 12:00 midnight of October 20, 1994, Captain Demetrio T. Jusep of M/V Delsan Express
received a report from his radio head operator in Japan that a typhoon was going to hit Manila in
about eight (8) hours. At approximately 8:35 in the morning of October 21, 1994, Capt. Jusep tried
to seek shelter at the North Harbor but could not enter the area because it was already congested.
At 10:00 a.m., Capt. Jusep decided to drop anchor at the vicinity of Vitas mouth, 4 miles away
from a Napocor power barge. At that time, Capt. Jusep ordered his crew to go full ahead to
counter the wind which was dragging the ship towards the Napocor power barge. To avoid collision,
Capt. Jusep ordered a full stop of the vessel. He succeeded in avoiding the power barge, but when
the engine was re-started and the ship was maneuvered full astern, it hit the deflector wall
constructed by respondent. The damage caused by the incident amounted to P456,198.24.
Respondent subsequently filed a complaint for damages against petitioner. The trial court
rendered judgment in favor of petitioner, finding the latter not guilty of negligence because it had
taken all the necessary precautions to avoid the accident. However, the same was reversed by the
appellate Court. Hence, this petition was filed with the Court with petitioner asserting that Capt.
Jusep was not negligent, and assuming he was, it cannot be held solidarily liable as it had exercised
due diligence in the selection of the Captain who is a duly licensed and competent master.
(Sales and Lease),
Law)
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ISSUES:
1. Was Capt. Jusep negligent?
2. Is petitioner solidarily liable under Article 2180 of the Civil Code for the quasi- delict
committed by the Captain?
HELD: 1. YES. The finding of negligence cannot be rebutted upon proof that the ship could not
have sought refuge at the North Harbor even if the transfer was done earlier. It is not the
speculative success or failure of a decision that determines the existence of negligence in the
present case, but the failure to take immediate and appropriate action under the circumstances.
Capt. Jusep, despite knowledge that the typhoon was to hit Manila in 8 hours, complacently waited
for the lapse of more than 8 hours thinking that the typhoon might change direction. He cannot
claim that he waited for the sun to rise instead of moving the vessel at midnight immediately after
receiving the report because of the difficulty of traveling at night. The hour of 8:35 a.m. is way
past sunrise. Furthermore, he did not transfer as soon as the sun rose because, according to him, it
was not very cloudy and there was no weather disturbance yet.
When he ignored the weather report notwithstanding reasonable foresight of harm,
Capt. Jusep showed an inexcusable lack of care and caution which an ordinary prudent person
would have observed in the same situation. Had he moved the vessel earlier, he could have had
greater chances of finding a space at the North Harbor considering that the Navotas Port where
they docked was very near North Harbor. Even if the latter was already congested, he would still
have time to seek refuge in other ports.
2) YES. Whenever an employee's negligence causes damage or injury to another, there

instantly arises a presumption juris tantum that the employer failed to exercise diligentissimi patris
families in the selection (culpa in eligiendo) or supervision (culpa in vigilando) of its employees. To
avoid liability for a quasi-delict committed by his employee, an employer must overcome the
presumption by presenting convincing proof that he exercised the care and diligence of a good
father of a family in the selection and supervision of his employee. However, the required diligence
of a good father of a family pertains not only to the selection but also to the supervision of
employees.
It was held that due diligence in supervision requires the formulation of rules and
regulations for the guidance of employees and the issuance of proper instructions as well as actual
implementation and monitoring of consistent compliance with the rules. In the case at bar,
however, petitioner presented no evidence that it formulated rules or guidelines for the proper
performance of functions of its employees and that it strictly implemented and monitored
compliance therewith. Failing to discharge the burden, petitioner should therefore be held liable
for the negligent act of Capt. Jusep.
Award of Moral Damages
GERARDO F. SAMSON JR., VS. BANK OF THE PHILIPPINE ISLANDS

[G.R. No. 150487, July 20, 2003.]
PANGANIBAN
FACTS: In his complaint, petitioner Gerardo F. Samson Jr. averred that he is a depositor of
respondent Bank of Philippine Islands through the latter’s Express Teller System. On August 20,
1990, petitioner deposited to his account a check in the amount of P 3,500.00. However, as the
same was not accounted for, petitioner’s daughter was not able to withdraw the needed cash in
the Express Teller machine on August 24, 1990. As a consequence of which, petitioner was not able
to pay his monetary obligation to his creditor who was at that time waiting at his house and
thereupon suffered embarrassment. Petitioner made known this fact to respondent bank who
conducted an investigation and thereafter discovered that the check which the former deposited
was stolen and encashed by respondent’s security guard. Petitioner maintains that respondent
should be held liable for damages for not taking immediate action on his case and for displaying an
arrogant attitude despite the fact that it was clearly at fault.
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On the other hand, respondent in its answer contended, among others, that petitioner, by
his inaction in reporting the loss of his check deposit, is estopped from claiming damages. The trial
court rendered judgment in favor of petitioner, which was subsequently affirmed by the appellate
Court. However, the latter modified the amount of damages, holding that though the award of
moral damages was proper in light of bad faith on the part of respondent Bank, nonetheless the
amount of P200,000 was excessive and thus need to be reduced to P50,000. Hence, this petition.
ISSUE: Was the reduction of the award of moral damages proper?
HELD: NO. Moral damages are awarded to enable the injured party to obtain means, diversions or
amusements that will serve to alleviate the moral suffering he/she has undergone, by reason of the
defendant's culpable action. Its award is aimed at restoration, as much as possible, of the spiritual
status quo ante; thus, it must be proportionate to the suffering inflicted. Since each case must be
governed by its own peculiar circumstances, there is no hard and fast rule in determining the
proper amount.
The social standing of the aggrieved party is essential to the determination of the proper
amount of the award. Otherwise, the goal of enabling him to obtain means, diversions, or
amusements to restore him to the status quo ante would not be achieved.We believe that the
award should be increased to P100,000, considering (1) that petitioner was a businessman and was
the highest lay person in the United Methodist Church; (2) that he was regarded by respondent and
its officers with arrogance and a condescending manner; and (3) that respondent successfully
postponed compensating him for more than a decade. This amount is more than the P50,000
granted by the CA, but not as much as the P200,000 granted by the RTC.
In Prudential Bank v. CA, Philippine National Bank v. CA and Metropolitan Bank v. Wong,
the Court consistently awarded moral damages of P100,000 in consideration of the reputation and
the social standing of the claimant, as well as the rulings in similar cases involving the negligence
of banks with regard to the accounts of their depositors. Hence, the award of moral damages is
increased to P100,000.
LAND TITLES AND DEEDS

Foreshore land remains part of the public domain and is outside the commerce of man
REPUBLIC OF THE PHILIPPINES vs. COURT OF APPEALS

[GR. No. 126316. JUNE 25, 2004.]
CALLEJO, SR.
FACTS: On June 22, 1994, private respondent Angel Yu filed a petition for the registration of a
parcel of land, designated as 524, Cad. 633-D, Estancia Cadastre, situated at the Poblacion, Zone 1,
Mun. of Estancia, Iloilo. Except for the opposition filed the by the Solicitor General, no one else
appeared to oppose the application/petition.
Pursuant to an order issued by the Regional Trial Court requiring the submission of a report
on the subject property, the Land Management Bureau and the Community Environment and
Natural Resources Office at Barotac Viejo submitted a certification to the former stating that their
respective offices has no record of any kind of public land application/land patent covering the
parcel of land sought to be registered. On the basis of the above certification, the court a quo
rendered a decision confirming the title of private respondent Angel Yu over Lot 524, Cad. 633-D,
Estancia Cadastre. The above decision became final and executory on June 14, 1995.
It appears that on May 29, 1995, the OSG received a copy of the supplementary report and
findings of the Land Management Officer Myra B. Rosal (the Rosal Report), which was submitted to
the court a quo in compliance with its earlier order, where it was stated “that Lot No. 524, Cad-
633-D is not an agricultural land. That out of the total area of 1,194 square meters, only around
850 square meters is dry land and that an area of 334 sq. meters which used to be covered and
(Sales and Lease),
Law)
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uncovered by water during high tide is now a reclaimed area, since way back 1977 when applicant
Angel Tilos Yu applied for a Foreshore Lease Application with [the] then Bureau of Lands.” On June
22, 1995, the OSG received a letter from the Regional Director of the DENR alleging that after due
investigation by its officers (the Catalan Report), there were grounds for opposition to respondent’s
application because the subject property was found to be a reclaimed foreshore area. With this,
the Republic filed a petition for annulment of judgment which was dismissed by the Court of
Appeals.
ISSUE: Can the subject land be registered in private respondent’s name?
HELD: NO. Foreshore land is that strip of land that lies between the high and low water marks
and is alternatively wet and dry according to the flow of tide. It is that part of the land adjacent to
the sea, which is alternately covered and left dry by the ordinary flow of tides. It is part of the
alienable land of the public domain and may be disposed of only by lease and not otherwise.
Foreshore land remains part of the public domain and is outside the commerce of man. It is not
capable of private appropriation.
It is for this reason that the petitioner persists in its action to revert the subject land to the
State. Thus, even if the decision of the RTC has become final and executory, we find that the
respondent court abused its discretion in dismissing the petition for annulment of judgment filed
before it which is impressed with public interest. There are valid and meritorious grounds to justify
such action. The State has to protect its interests and can not be bound by, or estopped from, the
mistakes or negligent acts of its officials or agents, much more, non-suited as a result thereof.
The Catalan Report, which states that the subject land is foreshore land, was received by
the OSG only on June 22, 1995, long after the RTC rendered its judgment on May 3, 1995. Angel T.
Yu had, in fact, filed a foreshore lease application in 1977 and paid the corresponding fees thereon.
There is, therefore, doubt to the respondent's claim that he had been in actual, open, notorious,
continuous possession, in the concept of an owner.
Moreover, the Rosal Report dated April 12, 1995 was received by the OSG only on May 29,
1995. Although the report states that Lot No. 524, Cad-633-D is declared public land and is
alienable and disposable per L.C. Map 1020, Project 44 dated July 26, 1933, the same report
buttresses the contention that the subject land is foreshore land and covered by a foreshore lease
application filed by Angel T. Yu. Finding the reports to be revealing and significant as to the real
status of the land being foreshore, the petitioner lost no time in filing the petition for annulment of
judgment with the Court of Appeals.
Finally, we can not uphold the respondent court's finding regarding the character of the
land. The Rosal Report clearly states that the subject land is not an agricultural land. Despite such
declaration, the respondent court continued to rule that the subject land is agricultural on the
basis that out of the total area of 1,194 square meters, 850 square meters is dry land and that 334
square meters is now a reclaimed area.
Torrens certificate does not create or vest title; It is merely an evidence of an indefeasible and
incontrovertible title to the property
AQUILA LARENA vs. FROCTUOSA MAPILI, ET. AL.

[GR No. 146341, AUGUST 7, 2003.]
PANGANIBAN
FACTS: Hipolito Mapili was the original owner of a parcel of unregistered land situated at Balabag,
Valencia, Negros Oriental. He died on July 14, 1934 and was survived by his only son Magno, the
father of herein private respondents, and daughters Julia, Azucena, Anatolia and Abundia who all
died without issue.
It appears that Filomena Larena, claiming that he bought the abovementioned property
from Hipolito, executed on October 28, 1949 an Affidavit of Transfer of Real Property covering the
same property. After the death of Filomena, herein petitioner took possession of the property
alleging that she bought the same from her deceased aunt.

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Private respondents thereafter sued herein petitioner alleging that her predecessor in
interest falsely stated in her Affidavit of Transfer of Real Property that Hipolito sold the property
to her on October 28, 1949, since at that moment it was impossible for the latter to have done so
as he was already dead.
In her answer, petitioner maintains that she is the lawful owner of the disputed property by
virtue of the issuance of the Torrens certificate in her name and that the same have been declared
for tax purposes in her name. Lastly, she maintains that respondents are already barred by
prescription and laches.
After trial on the merits, the court a quo found for private respondents. On appeal, the CA
affirmed in toto the decision of the lower court.
ISSUES:
1. Is petitioner correct in claiming ownership over the property on the basis of the Torrens
certificate and tax declarations?
2. Did petitioner’s predecessor in interest acquire the disputed property by means of sale,
prescription or laches?
HELD: 1. NO. Of no moment in the instant case is the issuance of a Torrens certificate pertaining
to the disputed property. It "does not create or vest title," but is merely an "evidence of an
indefeasible and incontrovertible title to the property in favor of the person whose name appears
therein." Land registration under the Torrens system was never intended to be a means of
acquiring ownership. Moreover, the Original Certificate of Title was never formally offered by
petitioners. In its Order dated October 1, 1993, the RTC considered their prolonged failure to offer
it in evidence as a waiver of their right to offer exhibits. In so ruling, the court a quo followed the
rule that evidence not formally offered should not be considered.
Neither does the existence of tax declarations change our mind. It is not a conclusive
evidence of ownership, but a "proof that the holder has a claim of title over the property." "Tax
Declaration No. 1419 for the year 1949 was registered in the name of the original owner, Hipolito
Mapili. A year later, Tax Declaration No. 9839 was registered in the name of Petitioner Aquila's
aunt. The RTC noted in its Decision that beginning 1968, the property had already been registered
in the name of Petitioner Aquila, as can be seen from Tax Declaration Nos. 18899, 34 4027 and 03-
640-C.
Normally, one will not pay taxes on a property not in one's actual or constructive possession.
Hence, being good indicia of possession in the concept of owner, the Tax Declarations in the name
of Petitioner Aquila may strengthen her bona fide claim of acquisition of ownership. Petitioners,
however, have not been able to present the evidence needed to tack the date of possession on the
property in question.
2. NO. Indeed, as found by both lower courts, the property had descended by succession
from Hipolito Mapili to his only son, Magno — the former's daughters having died without issue —
and on to the latter's own widow and children. These heirs took possession of the property up to
the outbreak of the Second World War when they evacuated to the hinterlands, where they
remained until the war was over.
It was in the 1970s when Petitioner Aquila Larena took possession of the property, alleging
that she had purchased it from her aunt, who in turn claimed to have bought it from Hipolito.
Aquila's allegations were never substantiated, and the Affidavit of Transfer on which she had
hinged her claim was even declared by the RTC to be spurious. Hipolito was already dead when
the alleged transfer was made to her aunt. Not having acquired the property, the latter had
nothing to sell.
Unfortunately for petitioners, prescription cannot be taken in their favor because, as we
mentioned earlier, there is no evidence on record that tacks on the property Petitioner Aquila's
date of possession. "Acquisitive prescription is a mode of acquiring ownership by a possessor
through the requisite lapse of time. In order to ripen into ownership, possession must be en
concepto de dueño, public, peaceful and uninterrupted." Coupled with the court a quo's finding
that the claims of purchase were unsubstantiated, petitioners' acts of a possessory character — acts
(Sales and Lease),
Law)
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that might have been merely tolerated by the owner — did not constitute possession. No matter
how long tolerated possession is continued, it does not start the running of the prescriptive period.
Gratia argumenti that the Tax Declarations indicate the date of actual or constructive
possession, petitioners still cannot benefit therefrom. Tax Declaration No. 9839, on the one hand,
was registered in 1950 in Filomena's name, not Aquila's. For lack of a just title, the ordinary
acquisitive prescription of ten years cannot be applied. Moreover, only twenty-seven years had
lapsed at the time the Complaint was filed — a period that was short of three years for
extraordinary acquisitive prescription to apply. Tax Declaration No. 18899, on the other hand, was
registered in Aquila's name in 1968. At the time the Complaint was filed, the elapsed period was
still short of one year for ordinary acquisitive prescription to apply. The same can be said of Tax
Declaration No. 4027, filed for the year 1974, which fell short of seven years.
Laches is likewise unavailing. Defined, it is the "failure or neglect, for an unreasonable and
unexplained length of time, to do that which could or should have been done earlier through the
exercise of due diligence." It is an "omission to assert a right within a reasonable time, warranting
a presumption that the party entitled thereto has either abandoned or declined to assert it."
Reconstitution of Title; Acquisitive Prescription
MERCEDES ALONSO, ET AL vs. CEBU COUNTRY CLUB, INC.,

[G.R. No. 130876, December 5, 2003.]
AUSTRIA-MARTINEZ
FACTS: In a decision dated January 31, 2002, the Court ruled that neither petitioner Tomas Alonso
nor his son Francisco Alonso or the latter’s heirs are the lawful owners of Lot NO. 727. Likewise,
neither respondent Cebu Country Club, Inc., was able to establish a clear title over the subject
land notwithstanding the reconstitution of title. Hence, the ownership of the land was vested to
the Government.
In light of the aforementioned ruling, both parties filed their respective Motions for
Reconsideration. On its part, respondent invoked prescription and further argued that
reconstitution of its title was suffice to prove ownership over the land.
ISSUES:
1. Was ownership acquired by respondent through prescription?
2. Whether or not reconstitution determines ownership of land covered by lost or
destroyed title?
HELD: 1. NO. The disputed property is part of the “Friar Lands” over which the Government holds
title and is not public lands but private or patrimonial property of the Government and can be
alienated only upon proper compliance with the requirements of Act No. 1120 or the Friar Lands
Act.
It is an iron clad rule that prescription can never lie against the Government. Since
respondent failed to present the paper trail of the property’s conversion to private property, the
lengthy possession and occupation of the disputed land by respondent cannot be counted in its
favor, as the subject property being a friar land, remained part of the patrimonial property of the
Government. Possession of patrimonial property of the Government, whether spanning decades or
centuries, can not ipso facto ripen into ownership. Moreover, the rule that statutes of limitation do
not run against the State, unless therein expressly provided, is founded on "the great principle of
public policy, applicable to all governments alike, which forbids that the public interests should be
prejudiced by the negligence of the officers or agents to whose care they are confided."
2. NO. Respondent relies solely on its reconstituted title which, by itself, does not
determine or resolve the ownership of the land covered by the lost or destroyed title. The
reconstitution of a title is simply the re-issuance of a lost duplicate certificate of title in its original
form and condition. It does not determine or resolve the ownership of the land covered by the lost
or destroyed title. A reconstituted title, like the original certificate of title, by itself does not vest
ownership of the land or estate covered thereby.
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Nature of certificate of title; Ownership over a property may still be sustained even if a title is
subsequently declared void
CREDIT TRANSACTION: Mortgagee in Good Faith
JUANITA P. PINEDA, ET. AL. vs. COURT OF APPEALS

[G.R. No. 114172. August 25, 2003.]
CARPIO
FACTS: On January 4, 1982, the Souses Benitez mortgaged a house and lot covered by TCT 8361 in
favor of herein petitioners Pineda and Sayoc to secure the loan obtained by the former from the
petitioners. Pineda and Sayoc did not register the real estate mortgage. The owners duplicate of
TCT 8361 was however delivered by the Spouses Benitez to Pineda.
On November 9, 1983, the Spouses Benitez, after obtaining the consent of petitioners, sold
the house to Olivia Mojica who there and then filed a petition for the issuance of a second owner’s
duplicate of TCT 8361 alleging that the owner’s duplicate of the same was lost. The court granted
Mojica’s petition and ordered the Register of Deeds to issue the second owner’s duplicate copy of
TCT 8361 in the name of the Spouses Benitez.
On December 7 of the same year, the Spouses Benitez sold the lot covered by TCT 8361 to
Mojica who immediately registered the Deed of Sale. As a consequence of which, TCT 8361 was
cancelled and TCT 13138 was issued in the name of Mojica.
On December 12, Mojica mortgaged the same property to Teresita Gonzales who
immediately registered with the Register of Deeds the deed of mortgage.
On May 8, 1985, herein petitioners filed a complaint praying for the cancellation of the
second owner’s duplicate of TCT 8361 against the Spouses Benitez and Mojica.
In their answer, both the Spouses Benitez and Mojica denied liability; the former alleging
that they did not have any knowledge of the fact that Mojica filed a petition for the issuance of a
second owner’s duplivate of TCT 8361, while the latter asserted that she verified with the Register
of Deeds of Cavite City the provision in the deed of sale that the Property was free from all liens
and encumbrances and found the same to be true. They prayed therefore that the complaint be
dismissed.
During the pendency of the case, Pineda caused the annotation on 18 August 1986 of a
notice of lis pendens on the original of TCT 8361 with the Register of Deeds.
After trial, the trial court rendered a Decision declaring the second owner's duplicate of
TCT No. T-8361 of the land records of Cavite as null and void.
However, for failure of Mojica to pay her obligation as they fell due, Gonzales
extrajudicially foreclosed the mortgage and purchased the property at a public auction conducted
on January 27, 1988. Subsequently, title to the property was consolidated in the name of Gonzales
after Mojica failed to redeem the same within the proper period. As a consequence of which, TCT
13138 was cancelled and in lieu thereof, TCT 16084 was issued in the name of Gonzales.
On appeal, the Court of Appeals affirmed the decision of the court a quo regarding the
status of the second owner's duplicate of TCT 8361. The above decision became final and
executory.
On motion of Pineda and Sayoc, the trial court issued a writ of execution to enforce the
judgment. The same however could not be satisfied since TCT 8361 had already been cancelled.
Hence, herein petitioners filed a motion for the issuance of an order requiring Gonzales to
surrender TCT 16084. The RTC subsequently declared void TCT 16084 and ordered the
reinstatement of TCT 8361 in the name of the Spouses Benitez.
Gonzales elevated the above decision to the CA who ruled in favor of Gonzales after it
found that the trial court erred when it voided TCT 16084 upon a mere motion for the surrender of
the owner's duplicate of TCT 16084 and in ordering the reinstatement of TCT 8361 in the name of
the Spouses Benitez. The CA held that petitioners should have filed the petition to surrender TCT
16084 in the original case where the decree of registration of TCT 16084 was entered and not in
Civil Case No. 4654 since the second paragraph of Section 108 of Presidential Decree No. 1529 16
("PD 1529") requires the filing of such separate petition.
(Sales and Lease),
Law)
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ISSUES:
1. Did the notice of lis pendens bound the subsequent purchaser of the property to the
outcome of the pending case?
2. Were TCT 13138 and TCT 16084, being derived from the void second owner's duplicate
of TCT 8361, also void?
3. Was the title to the property also void since the Certificate was void?
4. Was Gonzales an innocent purchaser for value?
HELD: 1. NO. The notice of lis pendens could not defeat Gonzales' rights over the Property for
two reasons. First, Gonzales registered in good faith her mortgage before the notation of the lis
pendens, making the registration of her mortgage valid despite the invalidity of TCT 13138. Second,
since Gonzales' mortgage was valid, the auction sale retroacted to the date of registration of her
mortgage, making the auction sale prior in time to the notice of lis pendens. Thus, TCT 16084,
issued to Gonzales as a result of the foreclosure sale, is valid.
When Gonzales purchased the Property at the auction sale, Pineda and Sayoc had already
annotated the lis pendens on the original of TCT 8361, which remained valid. However, the
mortgage of Gonzales was validly registered prior to the notation of the lis pendens. The
subsequent annotation of the lis pendens could not defeat the rights of the mortgagee or the
purchaser at the auction sale who derived their rights under a prior mortgage validly registered.
The settled rule is that the auction sale retroacts to the date of the registration of the mortgage,
putting the auction sale beyond the reach of any intervening lis pendens, sale or attachment. As
the Court explained in Caviles, Jr. v. Bautista:
We have also consistently ruled that an auction or execution sale retroacts to the date of
levy of the lien of attachment. When the subject property was sold on execution to the petitioners,
this sale retroacted to the date of inscription of petitioners' notice of attachment on October 6,
1982. The earlier registration of the petitioners' levy on preliminary attachment gave them
superiority and preference in rights over the attached property as against respondents.
Accordingly, we rule that the execution sale in favor of the petitioner Caviles spouses was
anterior and superior to the sale of the same property to the respondent Bautista spouses on
October 18, 1982. The right of petitioners to the surrender of the owner's duplicate copy of TCT
No. 57006 covering the subject property for inscription of the certificate of sale, and for the
cancellation of said certificate of title and the issuance of a new title in favor of petitioners cannot
be gainsaid.
A contrary rule would make a prior registration of a mortgage or any lien meaningless. The
prior registered mortgage of Gonzales prevails over the subsequent notice of lis pendens, even if
the auction sale took place after the notation of the lis pendens. Consequently, TCT 16084, issued
to Gonzales after she presented the sheriff's certificate of sale and her affidavit of consolidation, is
valid.
What remained with Pineda and Sayoc after the foreclosure was the mortgagor's residual
rights over the foreclosed Property, which rights are the equity of redemption and a share in the
surplus fund, if any. 32 Since Mojica was not a purchaser in good faith, the residual rights of Mojica
were subject to the claim of Pineda and Sayoc. Of course, Pineda and Sayoc may still file an action
to recover the outstanding debt of the Spouses Benitez, and even go after Mojica for her
assumption of obligation under the Acknowledgment of Indebtedness.
2. YES. Mojica filed a petition for reconstitution of the owner's duplicate of TCT 8361
claiming that this owner's duplicate was lost. However, contrary to Mojica's claims, the owner's
duplicate of TCT 8361 was not lost but in Pineda's possession. Since the owner's duplicate of TCT
8361 was in fact not lost or destroyed, there was obviously nothing to reconstitute or replace.
Therefore, the trial court correctly ruled that the reconstitution proceedings and the second
owner's duplicate of TCT 8361 are void.
Mojica registered with the Register of Deeds the deed of sale executed by the Spouses
Benitez conveying the Property to her. Mojica also presented to the Register of Deeds the second
owner's duplicate of TCT 8361. The Register of Deeds cancelled TCT 8361 and issued on 14
December 1983 TCT 13138 in the name of Mojica. However, since TCT 13138 is derived from the
CHAIRPERSONS
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void second owner's duplicate of TCT 8361, TCT 13138 is also void. No valid transfer certificate of
title can issue from a void transfer certificate of title, unless an innocent purchaser for value has
intervened.
3. NO. Mojica was not a purchaser in good faith. Mojica alleged that the Spouses Benitez
gave her the owner's duplicate of TCT 8361 on 9 November 1983, the day the Spouses Benitez sold
to her the house. However, in her petition for reconstitution, which she also filed on the same day,
9 November 1983, Mojica claimed that the owner's duplicate of TCT 8361 was lost. In effect, Mojica
claimed that she received the owner's duplicate of TCT 8361 from the Spouses Benitez, lost the
same, and filed the petition for reconstitution, all on the same day, 9 November 1983.
In her petition for reconstitution, Mojica also claimed that she "purchased a parcel of land"
when in fact she only purchased on 9 November 1983 the house, and not the lot covered by TCT
8361. Obviously, Mojica procured the reconstitution of the second owner's duplicate of TCT 8361
through misrepresentation. Hence, Mojica was not a purchaser in good faith when she later
purchased on 12 December 1983 the lot since she knew of the irregularity in the reconstitution of
the second owner's duplicate of TCT 8361.
Therefore, TCT 13138 issued in the name of Mojica is void. However, what is void is the
transfer certificate of title and not the title over the Property. The title refers to the ownership of
the Property covered by the transfer certificate of title while the transfer certificate of title
merely evidences that ownership. A certificate of title is not equivalent to title as the Court
explained in Lee Tek Sheng v. Court of Appeals:
“The certificate referred to is that document issued by the Register of Deeds known as the
Transfer Certificate of Title (TCT). By title, the law refers to ownership which is represented by
that document. Petitioner apparently confuses certificate with title. Placing a parcel of land under
the mantle of the Torrens system does not mean that ownership thereof can no longer be disputed.
Ownership is different from a certificate of title. The TCT is only the best proof of ownership of a
piece of land. Besides, their certificate cannot always be considered as conclusive evidence of
ownership. Mere issuance of the certificate of title in the name of any person does not foreclose
the possibility that the real property may be under co-ownership with persons not named in the
certificate or that the registrant may only be a trustee or that other parties may have acquired
interest subsequent to the issuance of the certificate of title. To repeat, registration is not the
equivalent of title, but is only the best evidence thereof. Title as a concept of ownership should
not be confused with the certificate of title as evidence of such ownership although both are
interchangeable”.
4. YES. The prior mortgage of the Property by the Spouses Benitez to Pineda and Sayoc did
not prevent the Spouses Benitez, as owners of the Property, from selling the Property to Mojica. A
mortgage is merely an encumbrance on the property and does not extinguish the title of the debtor
who does not lose his principal attribute as owner to dispose of the property. 22 The law even
considers void a stipulation forbidding the owner of the property from alienating the mortgaged
immovable.
Since the Spouses Benitez were the undisputed owners of the Property, they could validly
sell and deliver the Property to Mojica. The execution of the notarized deed of sale between the
Spouses Benitez and Mojica had the legal effect of actual or physical delivery. Ownership of the
Property passed from the Spouses Benitez to Mojica. The nullity of the second owner's duplicate of
TCT 8361 did not affect the validity of the sale as between the Spouses Benitez and Mojica.
After the sale of the Property to her, Mojica obtained a loan from Gonzales secured by a
real estate mortgage over the Property. Gonzales registered this mortgage on 22 February 1985
with the Register of Deeds who annotated the mortgage on the void TCT 13138 in Mojica's name.
The nullity of TCT 13138 did not automatically carry with it the nullity of the annotation of
Gonzales' mortgage. The rule is that a mortgage annotated on a void title is valid if the mortgagee
registered the mortgage in good faith. In Blanco v. Esquierdo, the Court held:
That the certificate of title issued in the name of Fructuosa Esquierdo is a nullity, the same
having been secured thru fraud, is not here in question. The only question for determination is
whether the defendant bank is entitled to the protection accorded to "innocent purchasers for

(Sales and Lease),
Law)
144
AW
value", which phrase, according to Sec. 38 of the Land Registration Law, includes an innocent
mortgagee for value. The question, in our opinion, must be answered in the affirmative.
The trial court, in the decision complained of, made no finding that the defendant
mortgagee bank was a party to the fraudulent transfer of the land to Fructuosa Esquierdo. Indeed,
there is nothing alleged in the complaint which may implicate said defendant mortgagee in the
fraud, or justify a finding that it acted in bad faith. On the other hand, the certificate of title was
in the name of the mortgagor Fructuosa Esquierdo when the land was mortgaged by her to the
defendant bank. Such being the case, the said defendant bank, as mortgagee, had the right to rely
on what appeared in the certificate and, in the absence of anything to excite suspicion, was under
no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on
the face of said certificate. (De Lara, et al. vs. Ayroso, 95 Phil., 185; 50 Off. Gaz., [10] 4838,
Joaquin vs. Madrid, et al., 106 Phil., 1060). Being thus an innocent mortgagee for value, its right or
lien upon the land mortgaged must be respected and protected, even if the mortgagor obtained her
title thereto thru fraud. The remedy of the persons prejudiced is to bring an action for damages
against those causing the fraud.
Thus, the annotation of Gonzales' mortgage on TCT 13138 was valid and operated to bind
the Property and the world, despite the invalidity of TCT 13138.
Gonzales registered her mortgage in good faith. Gonzales had no actual notice of the prior
unregistered mortgage in favor of Pineda and Sayoc. To bind third parties to an unregistered
encumbrance, the law requires actual notice. The fact that Mojica, who sold the Property to
Gonzales, had actual notice of the unregistered mortgage did not constitute actual notice to
Gonzales, absent proof that Gonzales herself had actual notice of the prior mortgage. Thus,
Gonzales acquired her rights as a mortgagee in good faith.
When Mojica defaulted in paying her debt, Gonzales caused the extrajudicial foreclosure of
the mortgaged Property. Gonzales purchased the mortgaged Property as the sole bidder at the
public auction sale. For Mojica's failure to redeem the foreclosed Property within the prescribed
period, Gonzales consolidated her title to the Property. Absent any evidence to the contrary, the
sale at public auction of the Property to Gonzales was valid. Thus, the title or ownership of the
Property passed from Mojica to Gonzales. At this point, therefore, Gonzales became the owner of
the Property.
Every person dealing with a registered property need not look beyond the certificate of title;
Exception
RUFINA C. CAYANA vs. COURT OF APPEALS

[G.R. No. 125607. March 18, 2004.]
TINGA
FACTS: The petitioners, Rufina Cayana, Josefina Rabina, Mercedes de Guzman and Susana Sambale,
and respondents Pastor and Marceliano Cayabyab are children of the spouses Raymundo and Eulalia
Cayabyab. The other respondents, Rosita and Rosalia Cayabyab are the wives of Pastor and
Marceliano Cayabyab, respectively. Respondent Rosemarie Cayabyab-Ramos is the daughter of
Marceliano Cayabyab, while respondent Rafael Ramos is the former's husband. Their dispute
involves two parcels of land, owned by spouses Raymundo and Eulalia Cayabyab. The said
properties were sold to Pastor Cayabyab by virtue of two Deeds of Absolute Sale, and thereafter,
Transfer Certificates of Title (TCT) were issued in the name of Pastor Cayabyab. Upon Raymundo’s
death in 1976, his wife, Eulalia Cayabyab, filed an Affidavit of Adverse Claim stating that the Deeds
of Sale in favor of Pastor Cayabyab were forgeries, however, a subsequent affidavit later revoked
the earlier adverse claim and requested that such annotations be cancelled on the titles of the
properties.
In February 1977, Eulalia Cayabyab, together with her children, herein petitioners, filed a
case against spouses Pastor and Rosita Cayabyab for annulment of the two Deeds of Absolute Sale
covering the two parcels of land, claiming they were forgeries. At the same time the respondent
spouses entered into a counter guaranty agreement the second parcel of land with the Insurance
Corporation of the Philippines, while the first parcel of land was mortgaged to the Rural Bank of
Urbiztondo, which was later cancelled when the same property was sold to Rosafina Reginaldo by
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CIVIL LDig
AW
virtue of a deed of absolute sale. On the other hand, Reginaldo mortgaged the property to the
Rural Bank of Urbiztondo. Meanwhile, the trial court later on rendered a decision in the civil case
for annulment of the deeds of sale and ruled in favor of the plaintiffs, declaring that the deeds of
absolute sale in favor of Pastor Cayabyab were nullified, and, no appeal having been taken, the
decision became final. On April 21, 1981, the mortgage over the first parcel of land was foreclosed,
and the Rural Bank of Urbiztondo, as the highest bidder, consolidated its title over the property,
thus canceling the earlier title in favor of Reginaldo and was issued a title in its own name. The
Bank then sold the first parcel of land to spouses Marceliano and Rosalia Cayabyab, who
subsequently sold it to spouses Ramos who were able to obtain a transfer certificate title in their
names.
Subsequently, in 1983, petitioners, as plaintiffs filed for the annulment of the deeds of sale
issued over the two parcels of land, as well as the transfer certificates of title that were issued in
favor of the vendees, as well as recovery of the properties, on the basis of a donation made by
Eulalia Cayabyab in favor of the petitioners involving the subject properties. The trial court,
recognizing the earlier civil case involving the same properties, applied res judicata and held
petitioners to be the rightful owners of the parcels of land. On appeal however, the decision was
reversed and held that the cancellation of the adverse claim by Eulalia was duly admitted; the
sales were valid and there was no showing that it was simulated or fictitious, thus holding the
TCT’s valid and enforceable and free from all liens and encumbrances, and declaring the
respondents to be purchasers in good faith contrary to petitioners’ claim that the notice of lis
pendens annotated on the titles were fully known to the vendees, thus making them purchasers in
bad faith, hence the present petition.
ISSUE: Are respondents purchasers in good faith?
HELD: NO. As a general rule, every person dealing with registered land may safely rely on the
correctness of the certificate of title issued therefor and the law will in no way oblige him to go
beyond the certificate to determine the condition of the property. However, this principle admits
of an unchallenged exception: “a person dealing with registered land has a right to rely on the
Torrens certificate of title and to dispense with the need of inquiring further except when the
party has actual knowledge of facts and circumstances that would impel a reasonably cautious man
to make such inquiry or when the purchaser has knowledge of a defect or the lack of title in his
vendor or of sufficient facts to induce a reasonably prudent man to inquire into the status of the
title of the property in litigation. The presence of anything which excites or arouses suspicion
should then prompt the vendee to look beyond the certificate and investigate the title of the
vendor appearing on the face of said certificate. One who falls within the exception can neither be
denominated an innocent purchaser for value nor a purchaser in good faith; and hence does not
merit the protection of the law.” The records disclose circumstances indicating that Rosafina
Reginaldo, the Rural Bank of Urbiztondo and the respondents Marceliano and Rosalia Cayabyab and
Rafael and Rosemarie Ramos were not purchasers in good faith.
To summarize, the records disclose circumstances indicating that Rosafina Reginaldo, the
Rural Bank of Urbiztondo and the respondents Marceliano and Rosalia Cayabyab and Rafael and
Rosemarie Ramos were not purchasers in good faith.
Rosafina Reginaldo purchased the First Parcel during the pendency of Civil Case No. 15298.
Moreover, she was one of the defendants, together with Pastor and Rosita Cayabyab, in Civil Case
No. SCC-552 filed by Eulalia Cayabyab and her children Alfredo, Ludovico, Marceliano, Mercedes,
Susana, Rufina, Buenaventura and Josefina for the annulment of certain documents concerning
several parcels of land, among which was the First Parcel.
As for the Rural Bank of Urbiztondo, it became a mortgagee of the First Parcel initially on
June 12, 1977 and later, on December 23, 1977, after the filing of the Complaint in Civil Case No.
15298 on February 9, 1977. After the decision in the case became final, the bank purchased the
property during foreclosure proceedings. It later sold the property to Marceliano Cayabyab, one of
the plaintiffs in Civil Case No. 15298.
As regards Marceliano, his participation in Civil Case Nos. 15298 and SCC-552 seals his
knowledge of the petitioners' claim over the subject properties.
(Sales and Lease),
Law)
146
AW
Likewise, Rafael and Rosemarie Ramos cannot feign ignorance of the proceedings in Civil
Case No. 15298 and the final decision therein declaring null and void the Deeds of Absolute Sale
and the corresponding TCTs issued in the name of Pastor Cayabyab. The fact that the parties are
family members also convinces the Court that the respondents' assertion of lack of knowledge of
Civil Case No. 15298 and the petitioners' claim over the subject properties is a mere pretext.
As regards the Second Parcel, it is not disputed that TCT No. 117094 is in Pastor Cayabyab's
name and possession. Emanating, as it did, from the final decision in Civil Case No. 15298, Pastor
Cayabyab's title is null and void.
The Court holds that the First and Second Parcels properly belong to the estate of
Raymundo and Eulalia Cayabyab, the same to be partitioned in accordance with the law on
succession.

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