G.R. No.

103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.

VITUG, J.:p

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be
contracted or incurred? This question is the core issue in the instant petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber &
Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel
mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by
way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in
the chattel mortgage agreement was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms thereof,
then this mortgage shall be null and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either as

a renewal of the former note, as an extension thereof, or as a new loan, or is given
any other kind of accommodations such as overdrafts, letters of credit, acceptances
and bills of exchange, releases of import shipments on Trust Receipts, etc., this
mortgage shall also stand as security for the payment of the said promissory note or
notes and/or accommodations without the necessity of executing a new contract and
this mortgage shall have the same force and effect as if the said promissory note or
notes and/or accommodations were existing on the date thereof. This mortgage shall
also stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of this
mortgage. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00. These 2

borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one
million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to
financial constraints, the loan was not settled at maturity. Respondent bank thereupon applied for
3

an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan
City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a
prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil
Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the
chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel
mortgage.
Petitioner corporation appealed to the Court of Appeals which, on 14 August 1991, affirmed, "in all
4

respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January
1992.

The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this
Court for having been insufficient in form and substance. Private respondent filed a motion to
dismiss the petition while petitioner corporation filed a compliance and an opposition to private
respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but
granted a second motion for reconsideration, thereby reinstating the petition and requiring private
respondent to comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed which the
6

Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of
right but of sound judicial discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog
the docket and needlessly consume the time of the Court. These technical and procedural rules,
however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective for, after all, the
dispensation of justice is the core reason for the existence of courts. In this instance, once again, the
Court is constrained to relax the rules in order to give way to and uphold the paramount and
overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty
or a suretyship, the faithful performance of the obligation by the principal debt or is secured by
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the
execution of the corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real property covered thereby;
and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit — upon the essential condition that if the obligation becomes
due and the debtor defaults, then the property encumbered can be alienated for the payment of the
obligation, but that should the obligation be duly paid, then the contract is automatically
7

extinguished proceeding from the accessory character of the agreement. As the law so puts it, once
8

the obligation is complied with, then the contract of security becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however,
10

can only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old contract conformably
with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to
11

execute the agreement so as to cover the after-incurred obligation can constitute an act of default on
the part of the borrower of the financing agreement whereon the promise is written but, of course,
the remedy of foreclosure can only cover the debts extant at the time of constitution and during the
life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof,
 is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to
the agreement, the chattel mortgage would still be valid between the parties (not against
third persons acting in good faith ), the fact, however, that the statute has provided that the
12

parties to the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud. 13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet
merely contemplated. In the chattel mortgage here involved, the only obligation specified in
the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later
fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian Catholic
Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court
14

said —

. . . A mortgage that contains a stipulation in regard to future advances in the credit

will take effect only from the date the same are made and not from the date of the
mortgage. 15

The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan, there no longer was any chattel mortgage that could cover the new loans that were
16

concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial
court for a specific finding on the amount of damages it has sustained "as a result of the unlawful
action taken by respondent bank against it." 7 This prayer is not reflected in its complaint which has
1

merely asked for the amount of P3,000,000.00 by way of moral damages. In LBC Express,
18

Inc. vs. Court of Appeals, we have said:

19

Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent
bank as an artificial person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has
merely been so named as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It
instead turned out to be, however, a source of disappointment for this Court to read in petitioner's
reply to private respondent's comment on the petition his so-called "One Final Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent
Court of Appeals should be required to justify its decision which completely
disregarded the basic laws on obligations and contracts, as well as the clear
provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
 Honorable Court; that in the event that its explanation is wholly unacceptable, this
Honorable Court should impose appropriate sanctions on the erring justices. This is
one positive step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate
jurisdiction. (Emphasis supplied.)
21

The statement is not called for. The Court invites counsel's attention to the admonition
in Guerrero vs. Villamor; thus:
22

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the
respect due to the courts of justice and judicial officers and . . . (to) insist on similar
conduct by others." This respectful attitude towards the court is to be observed, "not
for the sake of the temporary incumbent of the judicial office, but for the maintenance
of its supreme importance." And it is through a scrupulous preference for respectful
language that a lawyer best demonstrates his observance of the respect due to the
courts and judicial officers . . .
23

The virtues of humility and of respect and concern for others must still live on even in an age
of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside
without prejudice to the appropriate legal recourse by private respondent as may still be warranted
as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the
courts.

SO ORDERED.
G.R. No. 59255 December 29, 1995

OLIVIA M. NAVOA and ERNESTO NAVOA, petitioners,

vs.
COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO DOMDOMA, respondents.

BELLOSILLO, J.:

Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision of the Court of
Appeals which "modified" the order of the trial court dismissing the complaint for lack of cause of
1

action. The appellate court remanded the case to the court a quo for private respondents to file their
responsive pleading and for trial on the merits.

On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action
against petitioners for collection of various sums of money based on loans obtained by the latter. On
3 January 1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint
stated no cause of action and that plaintiffs had no capacity to sue.

After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the
trial court dismissed the case. A motion to reconsider the dismissal was denied.

On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December
1980 modified the order of dismissal "by returning the records of this case for trial on the merits,
upon filing of an answer subject to the provisions of Articles 1182 and 1197 of the Civil Code for the
first cause of action. The other causes of action should be tried on the merits subject to the defenses
the defendants may allege in their answer."

The instant petition alleges that respondent court erred: (a) in not dismissing the appeal for lack of
appellate jurisdiction over the case which involves merely a question of law; (b) in not affirming the
order of dismissal for lack of cause of action; and, (c) in holding that private respondents have a
cause of action under the second to the sixth causes of action of the complaint. 2

We cannot sustain the petition. Petitioners are now estopped from assailing the appellate jurisdiction
of the Court of Appeals after receiving an adverse judgment therefrom. Having participated actively
3

in the proceedings before the appellate court, petitioners can no longer question its authority.

Petitioners submit that private respondents failed to specify in their complaint a fixed period within
which petitioners should pay their obligations; that instead of stating that petitioners failed to
discharge their obligations upon maturity private respondents sought to collect on the checks which
were issued to them merely as security for the loans; and, that private respondents failed to make a
formal demand on petitioners to satisfy their obligations before filing the action.

For a proper determination of whether the complaint filed by private respondents sufficiently stated a
cause of action, we shall examine the relevant allegations in the complaint, to wit:
 Allegations Common To All Causes of Actions

xxx xxx xxx

3. That sometime in . . . February, 1977, when the Reycard Duet was in Manila,
plaintiff Teresita got acquainted with defendant Olivia in the jewelry business, the
former selling the jewelries of the latter; that to the Reycard Duet alone, plaintiff
Teresita sold jewelries worth no less than ONE HUNDRED TWENTY THOUSAND
(P120,000.00) PESOS in no less than twenty (20) transactions; that even when the
Reycards have already left, their association continued, and up to the month of
August, 1977, plaintiff Teresita sold for defendant Olivia jewelries worth no less than
TWENTY THOUSAND (P20,000.00) PESOS, in ten (10) transactions more or less;

xxx xxx xxx

5. That sometime in the month of June and July of 1977, defendant Olivia, on two
occasions, asked for a loan from plaintiff Teresita, for the purpose of investing the
same in the purchase of jewelries, which loan were secured by personal checks of
the former; that in connection with these loans, defendant promised plaintiff a
participation in an amount equivalent to one half (1/2) of the profit to be realized; that
on these loans, plaintiff was given a share in the amount of P1,200.00 in the first
transaction, and in the second transaction, the sum of P950.00;

First Cause of Action

6. That on August 15, 1977, defendant Olivia got from plaintiff Teresita, one diamond
ring, one and one half (1-1/2) karats, heart shape, valued in the amount of Fifteen
thousand (P15,000.00) Pesos; that as a security for the said ring, Olivia issued a
Philippine Commercial and Industrial Bank Check, San Sebastian Branch, dated
August 15, 1977, No. 13894, copy of which is hereto attached and made a part
hereof as Annex "A";

7. That the condition of the issuance of the check was — if the ring is not returned
within fifteen (15) days from August 15, 1977, the ring is considered sold; that after
fifteen days, plaintiff Teresita asked defendant Olivia if she could deposit the check,
and the answer of defendant Olivia was — hold it for sometime, until I tell you to
deposit the same; that the check was held until the month of November, 1977, and
when deposited, it was dishonored for lack of sufficient funds; that for the reason that
the aforementioned check was not honored when deposited, defendant Olivia should
be held liable for interest at the rate of one percent a month, from date of issue, until
the same is fully paid;

Second Cause of Action

8. That on August 25, 1977, plaintiff Teresita extended a loan to the herein defendant
Olivia in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No.
14307, dated Sept. 25, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "B";
9. That this loan was extended upon representation of defendant Olivia that she
needed money to pay for jewelries which she can resell for a big profit; that having
established her goodwill, by reason of the transaction mentioned in par. "5" hereof,
the loan was extended by plaintiff;

10. That this check, Annex "B", when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest at the rate of one percent (1%) per month, from the date of issue
until fully paid;

Third Cause of Action

11. That on August 27, 1977, plaintiff extended to defendant Olivia a loan in the
amount of FIVE THOUSAND PESOS (P5,000.00), secured by a Philippine
Commercial & Industrial Bank check, PCIBANK Singalong Branch, No. 14308, dated
Sept. 27, 1977, photo copy of which is hereto attached and made a part hereof as
Annex "C";

12. That this loan was extended on the same representation made by defendant
Olivia, stated in par. "9", under the terms and conditions stated in par. "5" hereof;

13. That the check Annex "C", has not as yet been paid up to now, hence, defendant
Olivia should be held liable for interest at the rate of one percent (1%) monthly, from
date of issue, until fully paid;

Fourth Cause of Action

14. That on August 30, 1977, plaintiff Teresita, extended a loan in favor of defendant
Olivia, in the amount of Five Thousand (P5,000.00) Pesos, secured by a Philippine
Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No. 14311,
dated Sept. 30, 1977, photo copy of which is hereto attached and made a part hereof
as Annex "D";

15. That this loan was extended on the same representation made by defendant
Olivia, as stated in par. "9" hereof, under the terms and conditions stated in par. "5"
hereof;

16. That this check, Annex "D" has not as yet been paid up to now, hence, she
should be held liable for interest thereon at the rate of one percent (1%) per month,
from date of issue, until fully paid;

Fifth Cause of Action

17. That on Sept. 15, 1977, plaintiff Teresita extended a loan in favor of defendant
Olivia, in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial & Industrial Bank check, PCIBANK Singalong Branch, No.
14320, dated October 15, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "E";
18. That this loan was given on the same representation made by defendant Olivia,
stated on par. "9" hereof, and under the terms and conditions stated in par. "5"
hereof;

19. That this check Annex "E" when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest at the rate of one percent (1%) monthly, from date of issue, until
fully paid;

Sixth Cause of Action

20. That on Sept. 27, 1977, plaintiff Teresita extended a loan to defendant Olivia, in
the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine
Commercial & Industrial Bank check, No. 14325, dated October 27, 1977, photo
copy of which is hereto attached and made a part hereof as Annex "F";

21. That this loan was given on the same representation made by defendant Olivia,
stated in par. "9" hereof, and under the terms and conditions stated in par. "5" hereof;

22. That this check, Annex F, when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest thereon, at the rate of one percent (1%) monthly, from date of issue,
until fully paid;

Seventh Cause of Action

23. That plaintiff, by reason of the two transactions in par. "5" hereof, reposed trust
and confidence on defendant Olivia, however, by virtue of these trust and
confidence, she availed of the same in securing the loans aforementioned by
misrepresentations, and as a direct consequence thereof, the loans have not as yet
been settled up to now, for which plaintiff Teresita suffered sleepless nights, mental
torture and wounded feelings, for the reason that the money used in said
transactions do all belong to her; that this situation is further aggravated by the
malicious act of defendant Olivia, by having filed a complaint with the Manila Police,
to the effect that she (Teresita) stole the checks involved in this case; that as a
consequence thereof, she was investigated and she suffered besmirched reputation,
social humiliation, wounded feelings, moral shock and similar injuries, for which
defendant Olivia should be held liable, as and by way of moral damages in the
amount of EIGHTY THOUSAND (P80,000.00) PESOS;

Eight Cause of Action

24. That as and by way of exemplary or corrective damages, to serve as an example

or correction for the public good, defendant Olivia should be held liable to pay to the
herein plaintiff Teresita, the amount of Ten Thousand Pesos, as exemplary
damages;

Ninth Cause of Action

25. That plaintiff, in order to protect her rights and interests, engaged the services of
the undersigned, and she committed herself to pay the following:
 a. The amount of P200.00 for every appearance in the trial of this case.

b. The amount of P2,000.00 as retainers fees.

c. An amount equivalent to ten percent of any recover from defendant.

On the basis of the allegations under the heading Allegations Common to all Causes of Action above
stated as well as those found under the First Cause of Action to the Ninth Cause of Action, should
the complaint be dismissed for want of cause of action?

A cause of action is the fact or combination of facts which affords a party a right to judicial
interference in his behalf. The requisites for a cause of action are: (a) a right in favor of the plaintiff
by whatever means and under whatever law it arises or is created, (b) an obligation on the part of
the defendant to respect and not to violate such right; and, (c) an act or omission on the part of the
defendant constituting a violation of the plaintiff's right or breach of the obligation of the defendant to
the plaintiff. Briefly stated, it is the reason why the litigation has come about; it is the act or omission
4

of defendant resulting in the violation of someone's right. 5

In determining the existence of a cause of action, only the statements in the complaint may properly
be considered. Lack of cause of action must appear on the face of the complaint and its existence
may be determined only by the allegations of the complaint, consideration of other facts being
proscribed and any attempt to prove extraneous circumstances not being allowed.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what
petitioners did in the case at bar, he is regarded as having hypothetically admitted all the averments
thereof. The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant and material
facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the
allegations in a complaint furnish sufficient basis by which the complaint can be maintained, the
same should not be dismissed regardless of the defense that may be assessed by the defendants. 6

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that
petitioner Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security
therefor a check for the same amount dated 15 August 1977 with the condition that if the ring was
not returned within fifteen (15) days the ring would be considered sold; and, after the lapse of the
period, private respondent Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa
requested the former not to deposit it in the meantime; that when Teresita Domdoma deposited the
check after holding it for sometime the same was dishonored for lack of funds. Private respondent
Teresita Domdoma sought to collect the amount of P15,000.00 plus interest from 15 August 1977
until fully paid.

From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August
1977 and despite the sale the latter failed to pay the price therefor even as the former was given
ample time to pay the agreed amount covered by a check. Clearly, respondent Teresita Domdoma's
right under the agreement with petitioner Olivia Navoa was violated by the latter.

In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates. All these loans were secured by separate checks
intended for each amount of loan obtained and dated one month after the contracts of loan were
executed. That when these checks were deposited on their due dates they were all dishonored by
the bank. As a consequence, private respondents prayed that petitioners be ordered to pay the
amounts of the loans granted to them plus one percent interest monthly from the dates the checks
were dishonored until fully paid.

Culled from the above, the right of private respondents to recover the amounts loaned to petitioners
is clear. Moreover, the corresponding duty of petitioners to pay private respondents is undisputed.
The question now is whether Petitioners committed an act or omission constituting a violation of the
right of private respondents.

All the loans granted to petitioners are secured by corresponding checks dated a month after each
loan was obtained. In this regard, the term security is defined as a means of ensuring the
enforcement of an obligation or of protecting some interest in property. It may be personal, as when
an individual becomes a surety or a guarantor; or a property security, as when a mortgage, pledge,
charge, lien, or other device is used to have property held, out of which the person to be made
secure can be compensated for loss. Security is something to answer for as a promissory
7

note. That is why a secured creditor is one who holds a security from his debtor for payment of a
8

debt. From the allegations in the complaint there is no other fair inference than that the loans were
9

payable one month after they were contracted and the checks issued by petitioners were drawn to
answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations.
Hence, private respondents filed the action with the trial court precisely to compel petitioners to pay
their due and demandable obligations. Art. 1169 of the Civil Code is explicit — those obliged to
deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation. The continuing refusal of petitioners to heed
the demand of private respondents stated in their complaint unmistakably shows the existence of a
cause of action on the part of the latter against the former.

Quite obviously, the trial court erred in dismissing the case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in remanding the case to the trial court for the filing
of an answer by petitioners and to try the case on the merits.

WHEREFORE, the petition is DENIED. The judgment of the Court of Appeals dated 11 December
1980 remanding the case to the trial court for the filing of petitioners' answer and thereafter for trial
on the merits is AFFIRMED. Costs against petitioners.

SO ORDERED
G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.

Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of
Manila a complaint for escheat of certain unclaimed bank deposits balances under the provisions of
Act No. 3936 against several banks, among them the First National City Bank of New York. It is
alleged that pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the
Philippines a statement under oath of their respective managing officials of all the credits and
deposits held by them in favor of persons known to be dead or who have not made further deposits
or withdrawals during the period of 10 years or more. Wherefore, it is prayed that said credits and
deposits be escheated to the Republic of the Philippines by ordering defendant banks to deposit
them to its credit with the Treasurer of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits that various
savings deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted
to the Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which
remained dormant for 10 years or more, are subject to escheat however, it has inadvertently
included in said report certain items amounting to P18,589.89 which, properly speaking, are not
credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not
included in the claim of plaintiff.

After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and
demand drafts as those which defendant wants excluded from the complaint come within the
purview of Act No. 3936, but not the telegraphic transfer payment which orders are of different
category. Consequently, the complaint was dismissed with regard to the latter. But, after a motion to
reconsider was filed by defendant, the court a quo changed its view and held that even said demand
drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff
has appealed. lawphil.net

Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or
deposits of money, bullion, security or other evidence of indebtedness of any kind, and
interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a
period of ten years or more. Such unclaimed balances, together with the increase and
proceeds thereof, shall be deposited with the Insular Treasure to the credit of the
Government of the Philippine Islands to be as the Philippine Legislature may direct.
It would appear that the term "unclaimed balances" that are subject to escheat include credits or
deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person
unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term
"credit" in its usual meaning is a sum credited on the books of a company to a person who appears
to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by
reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, a distinguished from that
which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1,
4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson,
101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term "deposits"
in banks where the relationship created between the depositor and the bank is that of creditor and
debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs.
Pacific Coast Biscuit Co., et al., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come within the meaning
of the term "credits" or "deposits" employed in the law? Can their import be considered as a sum
credited on the books of the bank to a person who appears to be entitled to it? Do they create a
creditor-debtor relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of said banking
terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs.
Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs.
Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the
former, an open letter of request from, and an order by, one person on another to pay a sum of
money therein mentioned to a third person, on demand or at a future time therein specified (13
Words and Phrases, 371). As a matter of fact, the term "draft" is often used, and is the common
term, for all bills of exchange. And the words "draft" and "bill of exchange" are used indiscriminately
(Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101;
Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No.
2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on
the instrument until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange
of itself does not operate as an assignment of the funds in the hands of the drawee available for the
payment thereon and the drawee is not liable on the bill unless and until he accepts the same." In
other words, in order that a drawee may be liable on the draft and then become obligated to the
payee it is necessary that he first accepts the same. In fact, our law requires that with regard to
drafts or bills of exchange there is need that they be presented either for acceptance or for payment
within a reasonable time after their issuance or after their last negotiation thereof as the case may be
(Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or
to the extent of the loss caused by the delay (Section 186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any
chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee
concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's
pretense, for it has been held that the latter is a primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. Thus, a cashier's check has been clearly
characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of
exchange payable demand. It is an order upon a third party purporting to drawn upon a
deposit of funds. Drinkall v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95
Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42
A.L.R. 1347. A cashier's check is of a very different character. It is the primary obligation of
the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes
its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W.
734)....
lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill
of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10
C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalent of a certified

check and the deposit represented by the check passes to the credit of the checkholder, who
is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756,
195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in
advance by the act of issuance, is not subject to countermand by the payee after
indorsement, and has the same legal effects as a certificate deposit or a certified check
(Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should come within
the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said that as the
transaction is for the establishment of a telegraphic or cable transfer the agreement to remit creates
a contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The
purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is
concerned, though insofar as the remitting bank is concerned the contract is executory until the
credit is established (Ibid.) We agree with the following comment the Solicitor General: "This is so
because the drawer bank was already paid the value of the telegraphic transfer payment order. In
the particular cases under consideration it appears in the books of the defendant bank that the
amounts represented by the telegraphic payment orders appear in the names of the respective
payees. If the latter choose to demand payment of their telegraphic transfers at the time the same
was (were) received by the defendant bank, there could be no question that this bank would have to
pay them. Now, the question is, if the payees decide to have their money remain for sometime in the
defendant bank, can the latter maintain that the ownership of said telegraphic payment orders is now
with the drawer bank? The latter was already paid the value of the telegraphic payment orders
otherwise it would not have transmitted the same to the defendant bank. Hence, it is absurd to say
that the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that the items
specifically referred to and listed under paragraph 3 of appellee bank's answer representing
telegraphic transfer payment orders should be escheated in favor of the Republic of the Philippines.
No costs
G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant.

Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine
National Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10,
1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C."
in the amount of P300,000. This special authorization was essential in view of the memorandum
order of President Concepcion dated May 17, 1918, limiting the discretional power of the local
manager at Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000, which, in
certain cases, could be increased to P10,000. Pursuant to this authorization, credit aggregating
P300,000, was granted the firm of "Puno y Concepcion, S. en C.," the only security required
consisting of six demand notes. The notes, together with the interest, were taken up and paid by July
17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion

contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente
Puno, P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000.
Member Miguel S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as
member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan
with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V.
Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and six months,
to pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must
hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly,
grant loans to any of the members of the board of directors of the bank nor to agents of the branch
banks." Section 49 of the same Act provides: "Any person who shall violate any of the provisions of
this Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to
exceed five years, or by both such fine and imprisonment." These two sections were in effect in 1919
when the alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January
30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These errors
they have argued adroitly and exhaustively in their printed brief, and again in oral argument.
Attorney-General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the
proposition of appellant one by one.
The question presented are reduced to their simplest elements in the opinion which follows:

I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of
section 35 of Act No. 2747?

Counsel argue that the documents of record do not prove that authority to make a loan was given,
but only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits
in question speak of a "credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490;
Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other
party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned,
with or without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit,"

II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by
Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not
prohibit what is commonly known as a "discount."

In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the
Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to
loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said
section referred to loans alone, and placed no restriction upon discount transactions. It becomes
material, therefore, to discover the distinction between a "loan" and a "discount," and to ascertain if
the instant transaction comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an
actual, live, transaction. But in its last analysis, to discount a paper is only a mode of loaning money,
with, however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan,
interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan
is generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not
discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because
(1) interest was not deducted from the face of the notes, but was paid when the notes fell due; and
(2) they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially
different from the facts in the Binalbagan Estate case. Just as there it was declared that the
operations constituted a loan and not a discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the
meaning of section 35 of Act No. 2747?
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect
loan." In this connection, it should be recalled that the wife of the defendant held one-half of the
capital of this partnership.

In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to
the intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a
wall of safety against temptation for a director of the bank. The prohibition against indirect loans is a
recognition of the familiar maxim that no man may serve two masters — that where personal interest
clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband
is financially interested in the success or failure of his wife's business venture, a loan to partnership
of which the wife of a director is a member, falls within the prohibition.

Various provisions of the Civil serve to establish the familiar relationship called a conjugal
partnership. (Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan to
such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant was tempted to mingle his personal and family
affairs with his official duties, and to permit the loan P300,000 to a partnership of no established
reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the
Supreme Court of Maryland said:

What then was the purpose of the law when it declared that no director or officer should
borrow of the bank, and "if any director," etc., "shall be convicted," etc., "of directly or
indirectly violating this section he shall be punished by fine and imprisonment?" We say to
protect the stockholders, depositors and creditors of the bank, against the temptation to
which the directors and officers might be exposed, and the power which as such they must
necessarily possess in the control and management of the bank, and the legislature unwilling
to rely upon the implied understanding that in assuming this relation they would not acquire
any interest hostile or adverse to the most exact and faithful discharge of duty, declared in
express terms that they should not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate
decision, it was said:

We are of opinion the statute forbade the loan to his copartnership firm as well as to himself
directly. The loan was made indirectly to him through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a
violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these
portions of Act No. 2747 were repealed by Act No. 2938, prior to the finding of the information and
the rendition of the judgment?

As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section
35 of the same Act, provides a punishment for any person who shall violate any of the provisions of
the Act. It is contended, however, by the appellant, that the repeal of these sections of Act No. 2747
by Act No. 2938 has served to take away the basis for criminal prosecution.
This same question has been previously submitted and has received an answer adverse to such
contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs.
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910],
218 U. S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the
holding, that where an Act of the Legislature which penalizes an offense, such repeals a former Act
which penalized the same offense, such repeal does not have the effect of thereafter depriving the
courts of jurisdiction to try, convict, and sentenced offenders charged with violations of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No.
2747, penalized by this law?

Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and
since section 49 of said Act provides a punishment not on the bank when it violates any provisions of
the law, but on a person violating any provisions of the same, and imposing imprisonment as a part
of the penalty, the prohibition contained in said section 35 is without penal sanction. lawph!l.net

The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the
board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)

VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank,
in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a
legal defense?

Counsel argue that if defendant committed the acts of which he was convicted, it was because he
was misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans
made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been
suffered by the Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant
has violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on
account of public policy and public interest, constitutes the crime. And, in this instance, as previously
demonstrated, the acts of the President of the Philippine National Bank do not fall within the purview
of the rulings of the Insular Auditor, even conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the
other stockholders. The law will not allow private profit from a trust, and will not listen to any
proof of honest intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the trial court, and the errors
assigned by the appellant, and with reference to previous decisions of this court on the same
subject, we are irresistibly led to the conclusion that no reversible error was committed in the trial of
this case, and that the defendant has been proved guilty beyond a reasonable doubt of the crime
charged in the information. The penalty imposed by the trial judge falls within the limits of the
punitive provisions of the law.

Judgment is affirmed, with the costs of this instance against the appellant. So ordered.
G.R. No. 133632 February 15, 2002

BPI INVESTMENT CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.

DECISION

QUISUMBING, J.:

This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and
its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the
judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for
foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private
respondents ALS Management and Development Corporation and Antonio K. Litonjua, consolidated
1

with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary
injunction by the private respondents against said petitioner.

The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in
bad faith. It awarded private respondents the amount of ₱300,000 for moral damages, ₱50,000 for
exemplary damages, and ₱50,000 for attorney’s fees and expenses for litigation. It likewise
dismissed the foreclosure suit for being premature.

The facts are as follows:

Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to
secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and
Antonio Litonjua for ₱850,000. They paid ₱350,000 in cash and assumed the ₱500,000 balance of
Roa’s indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to
private respondents and proposed to grant them a new loan of ₱500,000 to be applied to Roa’s debt
and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per
annum on the outstanding principal balance payable within ten years in equal monthly amortization
of ₱9,996.58 and penalty interest at the rate of 21% per annum per day from the date the
amortization became due and payable.

Consequently, in March 1981, private respondents executed a mortgage deed containing the above
stipulations with the provision that payment of the monthly amortization shall commence on May 1,
1981.

On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of
₱190,601.35. This reduced Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated
when BPIIC applied thereto the proceeds of private respondents’ loan of ₱500,000.
On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what
was left of their loan after full payment of Roa’s loan.

In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground
that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984,
amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos
(₱475,585.31). A notice of sheriff’s sale was published on August 13, 1984.

On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged,
among others, that they were not in arrears in their payment, but in fact made an overpayment as of
June 30, 1984. They maintained that they should not be made to pay amortization before the actual
release of the ₱500,000 loan in August and September 1982. Further, out of the ₱500,000 loan, only
the total amount of ₱464,351.77 was released to private respondents. Hence, applying the effects of
legal compensation, the balance of ₱35,648.23 should be applied to the initial monthly amortization
for the loan.

On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:

WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development

Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the
amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77,
with interest at 20% plus service charge of 1% per annum, payable on equal monthly and
successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months. The
amortization schedule attached as Annex "A" to the "Deed of Mortgage" is correspondingly reformed
as aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused
their publication in a newspaper of general circulation as defaulting debtors, and therefore orders
BPI to pay ALS and Litonjua the following sums:

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorney’s fees and expenses of litigation.

The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.

Costs against BPI.

SO ORDERED. 2

Both parties appealed to the Court of Appeals. However, private respondents’ appeal was dismissed
for non-payment of docket fees.

On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:

WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.

SO ORDERED. 3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery
of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected
only on September 13, 1982, the date when BPIIC released the purported balance of the ₱500,000
loan after deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly
amortization should commence only a month after the said date, as can be inferred from the
stipulations in the contract. This, despite the express agreement of the parties that payment shall
commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only
₱194,960.43. Evidence showed that private respondents had an overpayment, because as of June
1984, they already paid a total amount of ₱201,791.96. Therefore, there was no basis for BPIIC to
extrajudicially foreclose the mortgage and cause the publication in newspapers concerning private
respondents’ delinquency in the payment of their loan. This fact constituted sufficient ground for
moral damages in favor of private respondents.

The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition,
where BPIIC submits for resolution the following issues:

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE

LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA
122.

II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY’S FEES IN THE FACE OF IRREGULAR PAYMENTS MADE
BY ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
COURT OF APPEALS, 120 SCRA 707.

On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple
loan is perfected upon the delivery of the object of the contract, the loan contract in this case was
perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual
contract, and a loan contract is perfected at the time the contract of mortgage is executed
conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the
loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed,
hence, the amortization and interests on the loan should be computed from said date.

Petitioner also argues that while the documents showed that the loan was released only on August
1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of
mortgage of Frank Roa’s loan. This finds support in the registration on March 31, 1981 of the Deed
of Absolute Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and
ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the
release of the loan should be attributed to private respondents. As BPIIC only agreed to extend a
₱500,000 loan, private respondents were required to reduce Frank Roa’s loan below said amount.
According to petitioner, private respondents were only able to do so in August 1982.

In their comment, private respondents assert that based on Article 1934 of the Civil Code, a simple
4

loan is perfected upon the delivery of the object of the contract, hence a real contract. In this case,
even though the loan contract was signed on March 31, 1981, it was perfected only on September
13, 1982, when the full loan was released to private respondents. They submit that petitioner
misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend the loan was
perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery of
the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took
place. According to private respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay
the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. 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. Therefore, private respondents conclude, they did
not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as
it was only on September 13, 1982 when petitioner fully complied with its obligation under the loan
contract.

We agree with private respondents. A loan contract is not a consensual contract but a real contract.
It is perfected only upon the delivery of the object of the contract. Petitioner misapplied Bonnevie.
5

The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the
first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of
simple loan.

In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of ₱500,000 with respondent bank. The latter approved the application
through a board resolution. Thereafter, the corresponding mortgage was executed and registered.
However, because of acts attributable to petitioner, the loan was not released. Later, petitioner
instituted an action for damages. We recognized in this case, a perfected consensual contract which
under normal circumstances could have made the bank liable for not releasing the loan. However,
since the fault was attributable to petitioner therein, the court did not award it damages.

A perfected consensual contract, as shown above, can give rise to an action for damages. However,
said contract does not constitute the real contract of loan which requires the delivery of the object of
the contract for its perfection and which gives rise to obligations only on the part of the borrower.
6

In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the second release of the loan.
Following the intentions of the parties on the commencement of the monthly amortization, as found
by the Court of Appeals, private respondents’ obligation to pay commenced only on October 13,
1982, a month after the perfection of the contract.7

We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. As averred
8

by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle in reciprocal
obligations that 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. Only when a party has performed his part of the
9

contract can he demand that the other party also fulfills his own obligation and if the latter fails,
default sets in. Consequently, petitioner could only demand for the payment of the monthly
amortization after September 13, 1982 for it was only then when it complied with its obligation under
the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially
caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.

Other points raised by petitioner in connection with the first issue, such as the date of actual release
of the loan and whether private respondents were the cause of the delay in the release of the loan,
are factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic
rule that only questions of law can be raised in a petition for review under Rule 45 of the Rules of
Court, factual matters need not tarry us now. On these points we are bound by the findings of the
10

appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely
exercised its right under the mortgage contract because private respondents were irregular in their
monthly amortization. It invoked our ruling in Social Security System vs. Court of Appeals, 120
1âwphi1

SCRA 707, where we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals "the negligence of the appellant is not so gross as to warrant moral and temperate
damages," except that, said Court reduced those damages by only P5,000.00 instead of eliminating
them. Neither can we agree with the findings of both the Trial Court and respondent Court that the
SSS had acted maliciously or in bad faith. The SSS was of the belief that it was acting in the
legitimate exercise of its right under the mortgage contract in the face of irregular payments made by
private respondents and placed reliance on the automatic acceleration clause in the contract. The
filing alone of the foreclosure application should not be a ground for an award of moral damages in
the same way that a clearly unfounded civil action is not among the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages
because it insisted on the payment of amortization on the loan even before it was released. Further,
it did not make the corresponding deduction in the monthly amortization to conform to the actual
amount of loan released, and it immediately initiated foreclosure proceedings when private
respondents failed to make timely payment.

But as admitted by private respondents themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary damages. 11

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually
released to private respondents and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. For this purpose, the amount of ₱25,000 is
12

sufficient.

Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled
to litigate, we sustain the award of ₱50,000 in favor of private respondents as attorney’s fees.

WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The
award of moral and exemplary damages in favor of private respondents is DELETED, but the award
to them of attorney’s fees in the amount of ₱50,000 is UPHELD. Additionally, petitioner is
ORDERED to pay private respondents ₱25,000 as nominal damages. Costs against petitioner.

SO ORDERED.
G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:

Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals,
now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs.
Philippine Bank of Commerce, et al.," promulgated August 11, 1978 as well as the Resolution
1

denying the motion for reconsideration.

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First
Instance of Rizal against respondent Philippine Bank of Commerce sought the annulment of the
Deed of Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce
by the spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made
on September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration
and (b) the mortgage was executed by one who was not the owner of the mortgaged property. It
further alleged that the property in question was foreclosed pursuant to Act No. 3135 as amended,
without, however, complying with the condition imposed for a valid foreclosure. Granting the validity
of the mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should have
accepted petitioner's offer to redeem the property under the principle of equity said justice.

On the other hand, the answer of defendant Bank, now private respondent herein, specifically
denied most of the allegations in the complaint and raised the following affirmative defenses: (a) that
the defendant has not given its consent, much less the requisite written consent, to the sale of the
mortgaged property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that
the demand letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was
notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that
the law on contracts requires defendant's consent before Jose Lozano can be released from his
bilateral agreement with the former and doubly so, before plaintiff may be substituted for Jose
Lozano and Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two
renewals remain unpaid despite countless reminders and demands; of that the property in question
remained registered in the name of Jose M. Lozano in the land records of Rizal and there was no
entry, notation or indication of the alleged sale to plaintiff; (g) that it is an established banking
practice that payments against accounts need not be personally made by the debtor himself; and (h)
that it is not true that the mortgage, at the time of its execution and registration, was without
consideration as alleged because the execution and registration of the securing mortgage, the
signing and delivery of the promissory note and the disbursement of the proceeds of the loan are
mere implementation of the basic consensual contract of loan.

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a
motion for intervention. The intervention was premised on the Deed of Assignment executed by
petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and
interests of petitioner Honesto Bonnevie over the subject property. The intervention was ultimately
granted in order that all issues be resolved in one proceeding to avoid multiplicity of suits.

On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:

WHEREFORE, all the foregoing premises considered, judgment is hereby rendered

dismissing the complaint with costs against the plaintiff and the intervenor.

After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:

1. The lower court erred in not finding that the real estate mortgage executed by Jose
Lozano was null and void;

2. The lower court erred in not finding that the auction sale decide on August 19,
1968 was null and void;

3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the
property;

4. The lower court erred in not finding that the defendant acted in bad faith; and

5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming the decision of the
lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present
petition for review.

The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby
adopt the facts found the trial court and found by the Court of Appeals to be consistent with the
evidence adduced during trial, to wit:

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the
owners of the property which they mortgaged on December 6, 1966, to secure the
payment of the loan in the principal amount of P75,000.00 they were about to obtain
from defendant-appellee Philippine Bank of Commerce; that on December 8, 1966,
executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in
consideration of the sum of P100,000.00, P25,000.00 of which amount being payable
to the Lozano spouses upon the execution of the document, and the balance of
P75,000.00 being payable to defendant- appellee; that on December 6, 1966, when
the mortgage was executed by the Lozano spouses in favor of defendant-appellee,
the loan of P75,000.00 was not yet received them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the promissory note for that
amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments
 to defendant-appellee on the mortgage in the total amount of P18,944.22; that on
May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10,
1968, defendant-appellee applied for the foreclosure of the mortgage, and notice of
sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14,
1968; that auction sale was conducted on August 19, 1968, and the property was
sold to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to
repurchase the property failed, and on October 9, 1969, he caused an adverse claim
to be annotated on the title of the property. (Decision of the Court of Appeals, p. 5).

Presented for resolution in this review are the following issues:

Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.

II

Whether the extrajudicial foreclosure of the said mortgage was validly and legally
effected.

III

Whether petitioners had a right to redeem the foreclosed property.

IV

Granting that petitioners had such a right, whether respondent was justified in
refusing their offers to repurchase the property.

As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They
primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent
Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that when it was executed
on December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was
not received by the Lozano spouses "So much so that in the absence of a principal obligation, there
is want of consideration in the accessory contract, which consequently impairs its validity and fatally
affects its very existence." (Petitioners' Brief, par. 1, p. 7).

This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly
seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano
spouses. The fact that the latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract,
the herein contract of loan was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does
not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent
of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is
constituted. These provisions are expressly made part and parcel of the Deed of Sale with
Assumption of Mortgage.

Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that
the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned,
the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every
right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the
mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48).
Another argument for the respondent Bank is that a mortgage follows the property whoever the
possessor may be and subjects the fulfillment of the obligation for whose security it was constituted.
Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered into
the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its
validity whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following
grounds:

a) petitioners were never notified of the foreclosure sale.

b) The notice of auction sale was not posted for the period required by law.

c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not
being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not
aware of the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner
Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred
and assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie and
respondent Bank not likewise informed of the same. For the same reason, Raoul Bonnevie is not
entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor.
The requirement on notice is that:

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

In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July
14, 1968 and notices of the sale were posted for not less than twenty days in at least three (3) public
places in the Municipality where the property is located. Petitioners were thus placed on constructive
notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said
case involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly
registered making the mortgaged privy to the sale.

As regards the claim that the period of publication of the notice of auction sale was not in
accordance with law, namely: once a week for at least three consecutive weeks, the Court of
Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the
publication requirement under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only
14 days. We agree. Act No. 3135 merely requires that such notice shall be published once a week
for at least three consecutive weeks." Such phrase, as interpreted by this Court in Basa vs.
Mercado, 61 Phil. 632, does not mean that notice should be published for three full weeks.

The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance
with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit
of publication, executed by the Publisher, business/advertising manager of the Luzon Weekly
Courier, stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of
Sheriff's sale was published in said paper on June 30, July 7 and July 14, 1968. This constitutes
prima facie evidence of compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).

To be a newspaper of general circulation, it is enough that "it is published for the dissemination of
local news and general information; that it has a bona fide subscription list of paying subscribers;
that it is published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not
have the largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67).
The testimony of three witnesses that they do read the Luzon Weekly Courier is no proof that said
newspaper is not a newspaper of general circulation in the province of Rizal.

Whether or not the notice of auction sale was posted for the period required by law is a question of
fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126).
Nevertheless, the records show that copies of said notice were posted in three conspicuous places
in the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig
Municipal Hall. In the same manner, copies of said notice were also posted in the place where the
property was located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and
on Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal department of
respondent bank, namely:

Q How many days were the notices posted in these two places, if you
know?

A We posted them only once in one day. (TSN, p. 45, July 25, 1973)

is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before the
expiration of the twenty- day period. A single act of posting (which may even extend beyond the
period required by law) satisfies the requirement of law. The burden of proving that the posting
requirement was not complied with is now shifted to the one who alleges non-compliance.

On the question of whether or not the petitioners had a right to redeem the property, We hold that
the Court of Appeals did not err in ruling that they had no right to redeem. No consent having been
secured from respondent Bank to the sale with assumption of mortgage by petitioners, the latter
were not validly substituted as debtors. In fact, their rights were never recorded and hence,
respondent Bank is charged with the obligation to recognize the right of redemption only of the
Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may
be, the petitioners had acquired a right to redeem the property, petitioners failed to exercise said
right within the period granted by law. Thru certificate of sale in favor of appellee was registered on
September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not
until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at that time already
transferred his rights to intervenor Raoul Bonnevie.

On the question of whether or not respondent Court of Appeals erred in holding that respondent
Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to
respondent Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized
to make payments for the amount secured by the mortgage on the subject property, to receive
acknowledgment of payments, obtain the Release of the Mortgage after full payment of the
obligation and to take delivery of the title of said property. On the assumption that the letter was
received by respondent Bank, a careful reading of the same shows that the plaintiff was merely
authorized to do acts mentioned therein and does not mention that petitioner is the new owner of the
property nor request that all correspondence and notice should be sent to him.

The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the
maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied for
the foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect and
misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968,
when respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners'
payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan
may be effected, not only the payment of the accrued interest is necessary but also the payment of
interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed
does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank
may not be, therefore, charged of bad faith.

WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the
loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo,
Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the
said title the next day. The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering
a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
 loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the

promissory note?
 3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is not
ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less
neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). 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 (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not
necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter.
But when the consideration is subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p.
583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs.
Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). 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 (Metropolitan Life Ins. Co. vs. Peterson, Vol.
19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to
the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of other heirs who have not been
paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED
UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.NO COSTS. SO ORDERED.

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56
and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding
purposes subject to a government charge of breeding fee of 10% of the book value of the bulls.
Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another
period of one year. However, the Secretary of Agriculture and Natural Resources approved a
renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the
return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry
that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy
them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On
19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls
could not be reduced and that they either be returned or their book value paid not later than 31
October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So,
on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines
commenced an action against him praying that he be ordered to return the three bulls loaned to him
or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of
P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil
No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao,
and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and
the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the
book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to
which depreciation the Auditor General did not object, he could not return the animals nor pay their
value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three
bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the
legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18
October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed
by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside
Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the
surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix
of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the
two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in
November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on
Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6
February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion.
Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this
opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station,
Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's
motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of
P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held
liable for the two bulls which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where
the animal was kept, and that as such death was due to force majeure she is relieved from the duty
of returning the bull or paying its value to the appellee. The contention is without merit. The loan by
the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a
period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards
one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the
bulls. The appellant contends that the contract was commodatum and that, for that reason, as the
appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A
contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a
compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code
the lessee would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the contract
be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a
bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the
bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when
lent and delivered to the deceased husband of the appellant the bulls had each an appraised book
value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It
was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the
appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be presented or filed in the intestate proceedings
of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim
that his civil personality having ceased to exist the trial court lost jurisdiction over the case against
him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon
proper notice, the legal representative of the deceased to appear and to be substituted for
the deceased, within a period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of
Rule 3 which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the
court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had
been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having
claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied,
whether the same be due, not due, or contingent, for funeral expenses and expenses of the last
sickness of the said decedent, and judgment for monopoly against him, to file said claims with the
Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the
date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad
M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the
court and the appellee who were to be notified of the defendant's death in accordance with the
above-quoted rule, and there was no reason for such failure to notify, because the attorney who
appeared for the defendant was the same who represented the administratrix in the special
proceedings instituted for the administration and settlement of his estate. The appellee or its attorney
or representative could not be expected to know of the death of the defendant or of the
administration proceedings of his estate instituted in another court that if the attorney for the
deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant
is only liable for the sum of P859.63, the value of the bull which has not been returned to the
appellee, because it was killed while in the custody of the administratrix of his estate. This is the
amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7
January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V.
Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment
rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the administratrix appointed by the
court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to
costs.
G.R. No. 146364 June 3, 2004

COLITO T. PAJUYO, petitioner,

vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000 Resolution
of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November
1996 decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming the 15 December
1995 decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6

The Antecedents

In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made
of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.

On 8 December 1985, Pajuyo 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 September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.

Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 ("MTC").

In his Answer, Guevarra claimed 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.

On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of
the MTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and
against defendant, ordering the latter to:
 A) vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;

B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00) monthly as
reasonable compensation for the use of the premises starting from the last demand;

C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and

D) pay the cost of suit.

SO ORDERED.7

Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").

On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:

WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is
hereby affirmed en toto.

SO ORDERED.8

Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December
1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of
Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time to File Appeal by
Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.

On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.

On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the motion
for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.

On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10 granting
the motion for extension conditioned on the timeliness of the filing of the motion.

On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition for
review. On 11 April 1997, Pajuyo filed his Comment.

On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:

WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case
No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment
case filed against defendant-appellant is without factual and legal basis.

SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarra’s petition for review because it was filed out of
time. Moreover, it was Guevarra’s counsel and not Guevarra who signed the certification against
forum-shopping.

On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
reconsideration. The dispositive portion of the resolution reads:

WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.

SO ORDERED.12

The Ruling of the MTC

The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and
not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made Guevarra’s
continued possession of the house illegal.

The Ruling of the RTC

The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the
house on demand.

The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarra’s rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical possession,
not ownership.

The Ruling of the Court of Appeals

The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.

Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or
title over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra
are in pari delicto or in equal fault. The court will leave them where they are.

The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court
of Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the
agreement is not for a price certain.

Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held
that Guevarra has a better right over the property under Proclamation No. 137. President Corazon
C. Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time,
Guevarra was in physical possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in the National Housing Project
("the Code"), the actual occupant or caretaker of the lot shall have first priority as beneficiary of the
project. The Court of Appeals concluded that Guevarra is first in the hierarchy of priority.

In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim that
Guevarra filed his motion for extension beyond the period to appeal.

The Court of Appeals pointed out that Guevarra’s motion for extension filed before the Supreme
Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk. The
Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyo’s claim that
the motion for extension was undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the expiration of the reglementary period
on 14 December 1996. Thus, the motion for extension properly complied with the condition imposed
by the Court of Appeals in its 28 January 1997 Resolution. The Court of Appeals explained that the
thirty-day extension to file the petition for review was deemed granted because of such compliance.

The Court of Appeals rejected Pajuyo’s argument that the appellate court should have dismissed the
petition for review because it was Guevarra’s counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after
he had extensively argued on the merits of the case. This technicality, the appellate court opined,
was clearly an afterthought.

The Issues

Pajuyo raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND

DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:

1) in GRANTING, instead of denying, Private Respondent’s Motion for an Extension

of thirty days to file petition for review at the time when there was no more period to
extend as the decision of the Regional Trial Court had already become final and
executory.

2) in giving due course, instead of dismissing, private respondent’s Petition for

Review even though the certification against forum-shopping was signed only by
counsel instead of by petitioner himself.

3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact
a commodatum, instead of a Contract of Lease as found by the Metropolitan Trial
Court and in holding that "the ejectment case filed against defendant-appellant is
without legal and factual basis".

4) in reversing and setting aside the Decision of the Regional Trial Court in Civil
Case No. Q-96-26943 and in holding that the parties are in pari delicto being both
squatters, therefore, illegal occupants of the contested parcel of land.

5) in deciding the unlawful detainer case based on the so-called Code of Policies of
the National Government Center Housing Project instead of deciding the same under
the Kasunduan voluntarily executed by the parties, the terms and conditions of which
are the laws between themselves.13
 The Ruling of the Court

The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.

Procedural Issues

Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for
review because the RTC decision had already become final and executory when the appellate court
acted on Guevarra’s motion for extension to file the petition. Pajuyo points out that Guevarra had
only one day before the expiry of his period to appeal the RTC decision. Instead of filing the petition
for review with the Court of Appeals, Guevarra filed with this Court an undated motion for extension
of 30 days to file a petition for review. This Court merely referred the motion to the Court of Appeals.
Pajuyo believes that the filing of the motion for extension with this Court did not toll the running of the
period to perfect the appeal. Hence, when the Court of Appeals received the motion, the period to
appeal had already expired.

We are not persuaded.

Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to
the Court of Appeals by petition for review in cases involving questions of fact or mixed questions of
fact and law.14 Decisions of the regional trial courts involving pure questions of law are appealable
directly to this Court by petition for review.15 These modes of appeal are now embodied in Section 2,
Rule 41 of the 1997 Rules of Civil Procedure.

Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarra’s
petition for review gives the impression that the issues he raised were pure questions of law. There
is a question of law when the doubt or difference is on what the law is on a certain state of
facts.16 There is a question of fact when the doubt or difference is on the truth or falsity of the facts
alleged.17

In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s petition
for review raised these questions: (1) Do ejectment cases pertain only to possession of a structure,
and not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter
constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on
which a squatter’s structure stands be considered in an ejectment suit filed by the owner of the
structure?

These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal.
However, some factual questions still have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual matters refer to the metes and bounds of
the disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.

The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an extension of
time applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The
prohibition does not apply in a petition for review where the pleading needs verification. A petition for
review, unlike an ordinary appeal, requires preparation and research to present a persuasive
position.20 The drafting of the petition for review entails more time and effort than filing a notice of
appeal.21 Hence, the Court of Appeals may allow an extension of time to file a petition for review.

In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’s clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions
for review with the Court of Appeals. The extension, however, should be limited to only fifteen days
save in exceptionally meritorious cases where the Court of Appeals may grant a longer period.

A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact
on the lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC decision could
not have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.

The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s motion
for extension. The Court of Appeals gave due course to the motion for extension because it
complied with the condition set by the appellate court in its resolution dated 28 January 1997. The
resolution stated that the Court of Appeals would only give due course to the motion for extension if
filed on time. The motion for extension met this condition.

The material dates to consider in determining the timeliness of the filing of the motion for extension
are (1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2)
the date of filing of the motion for extension.24 It is the date of the filing of the motion or pleading, and
not the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus,
even if the motion for extension bears no date, the date of filing stamped on it is the reckoning point
for determining the timeliness of its filing.

Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Court’s
Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly
one day before the lapse of the reglementary period to appeal.

Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for
review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the procedural issues
against Guevarra’s petition for review.

A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court.25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking
the court’s jurisdiction after voluntarily submitting to it is against public policy.26

In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to sign
the certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the
verification, claiming that the counsel’s verification is insufficient since it is based only on "mere
information."

A party’s failure to sign the certification against forum shopping is different from the party’s failure to
sign personally the verification. The certificate of non-forum shopping must be signed by the party,
and not by counsel.27 The certification of counsel renders the petition defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.29 It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith.30 The party need not sign the verification. A party’s representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification.31

We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect at the early
stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession

Settled is the rule that the defendant’s claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession,
especially if the ownership is inseparably linked with the possession.33 The adjudication on the issue
of ownership is only provisional and will not bar an action between the same parties involving title to
the land.34 This doctrine is a necessary consequence of the nature of the two summary actions of
ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is the physical
or material possession over the real property.35

In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of
the contested property and that they are mere squatters. Will the defense that the parties to the
ejectment case are not the owners of the disputed lot allow the courts to renounce their jurisdiction
over the case? The Court of Appeals believed so and held that it would just leave the parties where
they are since they are in pari delicto.

We do not agree with the Court of Appeals.

Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession
except to prove the nature of the possession when necessary to resolve the issue of physical
possession.36 The same is true when the defendant asserts the absence of title over the property.
The absence of title over the contested lot is not a ground for the courts to withhold relief from the
parties in an ejectment case.

The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.37 It does not even matter if a party’s title to the property is questionable,38 or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.39 Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.40 Neither is
the unlawful withholding of property allowed. Courts will always uphold respect for prior possession.

Thus, a party who can prove prior possession can recover such possession even against the owner
himself.41 Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right
lawfully ejects him.42 To repeat, the only issue that the court has to settle in an ejectment suit is the
right to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the land.
The plaintiff had prior possession and had already introduced improvements on the public land. The
plaintiff had a pending application for the land with the Bureau of Lands when the defendant ousted
him from possession. The plaintiff filed the action of forcible entry against the defendant. The
government was not a party in the case of forcible entry.

The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the
Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled
that courts have jurisdiction to entertain ejectment suits even before the resolution of the application.
The plaintiff, by priority of his application and of his entry, acquired prior physical possession over
the public land applied for as against other private claimants. That prior physical possession enjoys
legal protection against other private claimants because only a court can take away such physical
possession in an ejectment case.

While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owner’s permission. Title to the land remained with the government because
it had not awarded to anyone ownership of the contested public land. Both the plaintiff and the
defendant were in effect squatting on government property. Yet, we upheld the courts’ jurisdiction to
resolve the issue of possession even if the plaintiff and the defendant in the ejectment case did not
have any title over the contested land.

Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.45 The party deprived of possession must not take the law into his own
hands.46 Ejectment proceedings are summary in nature so the authorities can settle speedily actions
to recover possession because of the overriding need to quell social disturbances.47

We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:

The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.

Our problem is made simple by the fact that under the Civil Code, either in the old, which
was in force in this country before the American occupation, or in the new, we have a
possessory action, the aim and purpose of which is the recovery of the physical possession
of real property, irrespective of the question as to who has the title thereto. Under the
Spanish Civil Code we had the accion interdictal, a summary proceeding which could be
brought within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron,
6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action
of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court
to be "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 court to assert their claims." (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act
(Act No. 926) the action of forcible entry was already available in the courts of the country.
So the question to be resolved is, Did the Legislature intend, when it vested the power and
authority to alienate and dispose of the public lands in the Lands Department, to exclude the
courts from entertaining the possessory action of forcible entry between rival claimants or
occupants of any land before award thereof to any of the parties? Did Congress intend that
the lands applied for, or all public lands for that matter, be removed from the jurisdiction of
the judicial Branch of the Government, so that any troubles arising therefrom, or any
breaches of the peace or disorders caused by rival claimants, could be inquired into only by
the Lands Department to the exclusion of the courts? The answer to this question seems to
us evident. The Lands Department does not have the means to police public lands; neither
does it have the means to prevent disorders arising therefrom, or contain breaches of the
peace among settlers; or to pass promptly upon conflicts of possession. Then its power is
clearly limited to disposition and alienation, and while it may decide conflicts of
possession in order to make proper award, the settlement of conflicts of possession
which is recognized in the court herein has another ultimate purpose, i.e., the
protection of actual possessors and occupants with a view to the prevention of
breaches of the peace. The power to dispose and alienate could not have been
intended to include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this, therefore, the
corresponding branches of the Government must continue to exercise power and jurisdiction
within the limits of their respective functions. The vesting of the Lands Department with
authority to administer, dispose, and alienate public lands, therefore, must not be
understood as depriving the other branches of the Government of the exercise of the
respective functions or powers thereon, such as the authority to stop disorders and
quell breaches of the peace by the police, the authority on the part of the courts to
take jurisdiction over possessory actions arising therefrom not involving, directly or
indirectly, alienation and disposition.

Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the
courts will not interfere with the administration of matters concerning the same. (50 C. J.
1093-1094.) We have no quarrel with this principle. The determination of the respective
rights of rival claimants to public lands is different from the determination of who has the
actual physical possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has been deprived thereof by
another through the use of force or in any other illegal manner, can never be "prejudicial
interference" with the disposition or alienation of public lands. On the other hand, if courts
were deprived of jurisdiction of cases involving conflicts of possession, that threat of
judicial action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between
applicants, occupants or squatters, where force or might, not right or justice, would
rule.

It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
 entry. This action, both in England and the United States and in our jurisdiction, is a
summary and expeditious remedy whereby one in peaceful and quiet possession may
recover the possession of which he has been deprived by a stronger hand, by violence or
terror; its ultimate object being to prevent breach of the peace and criminal disorder. (Supia
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran vs.
Villanueva, 37 Phil. 752.) The title or right to possession is never in issue in an action of
forcible entry; as a matter of fact, evidence thereof is expressly banned, except to prove the
nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature of the action
in mind, by no stretch of the imagination can conclusion be arrived at that the use of the
remedy in the courts of justice would constitute an interference with the alienation,
disposition, and control of public lands. To limit ourselves to the case at bar can it be
pretended at all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for the
question of priority of possession having been decided in a final manner by the courts, said
question need no longer waste the time of the land officers making the adjudication or
award. (Emphasis ours)

The Principle of Pari Delicto is not Applicable to Ejectment Cases

The Court of Appeals erroneously applied the principle of pari delicto to this case.

Articles 1411 and 1412 of the Civil Code48 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.49

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.50

In Drilon v. Gaurana,51 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.52

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.

Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery
of possession seek to prevent.53 Even the owner who has title over the disputed property cannot take
the law into his own hands to regain possession of his property. The owner must go to court.

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.

Possession is the only Issue for Resolution in an Ejectment Case

The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held
that the pivotal issue in this case is who between Pajuyo and Guevarra has the "priority right as
beneficiary of the contested land under Proclamation No. 137."54 According to the Court of Appeals,
Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of the Code
declares that the actual occupant or caretaker is the one qualified to apply for socialized housing.

The ruling of the Court of Appeals has no factual and legal basis.

First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that
it declared open for disposition to bona fide residents.

The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No.
137. He failed to do so.

Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated claim
that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.

There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation
No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the
property in September 1994.

During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No.
137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the property,
Guevarra did not take any step to comply with the requirements of Proclamation No. 137.

Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve
the issue of possession. However, the jurisdiction of the courts would be limited to the issue of
physical possession only.

In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of who has the actual physical
possession or who has a better right of physical possession.56 The administrative disposition and
alienation of public lands should be threshed out in the proper government agency.57

The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No. 137
was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts
should not preempt the decision of the administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent disorder and breaches of
peace.58

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.
The Kasunduan reads:

Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng
"walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at
lote.

Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.

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.59

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.60 The defendant’s refusal to comply with the demand makes
his continued possession of the property unlawful.61 The status of the defendant in 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.62

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.

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.63 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.64 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.65 If the bailor should have urgent need of the thing, he may demand
its return for temporary use.66 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.67 Under the
Civil Code, precarium is a kind of commodatum.68

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.69 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.70 These contracts certainly involve the
obligation to deliver or return the thing received.71

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.

Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing
an absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra bases his
argument on the preferential right given to the actual occupant or caretaker under Proclamation No.
137 on socialized housing.

We are not convinced.

Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide
who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.

Prior possession is not always a condition sine qua non in ejectment.73 This is one of the distinctions
between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus,
he must allege and prove prior possession.75 But in unlawful detainer, the defendant unlawfully
withholds possession after the expiration or termination of his right to possess under any contract,
express or implied. In such a case, prior physical possession is not required.76

Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s transient
right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession
of the property because Guevarra had to seek Pajuyo’s permission to temporarily hold the property
and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property
still rested with Pajuyo and this is evidence of actual possession.

Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the ground
before he is deemed in possession.77 One may acquire possession not only by physical occupation,
but also by the fact that a thing is subject to the action of one’s will.78 Actual or physical occupation is
not always necessary.79

Ruling on Possession Does not Bind Title to the Land in Dispute

We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to
said property."80 We made this declaration because the person who had title or who had the right to
legal possession over the disputed property was a party in the ejectment suit and that party instituted
the case against squatters or usurpers.

In this case, the owner of the land, which is the government, is not a party to the ejectment case.
This case is between squatters. Had the government participated in this case, the courts could have
evicted the contending squatters, Pajuyo and Guevarra.

Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid
of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous
implications as the application of the principle of pari delicto. Squatters would then rather settle the
issue of physical possession among themselves than seek relief from the courts if the plaintiff and
defendant in the ejectment case would both stand to lose possession of the disputed property. This
would subvert the policy underlying actions for recovery of possession.

Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.81
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue
of physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.82 The owner can still go to court to recover
lawfully the property from the person who holds the property without legal title. Our ruling here does
not diminish the power of government agencies, including local governments, to condemn, abate,
remove or demolish illegal or unauthorized structures in accordance with existing laws.

Attorney’s Fees and Rentals

The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s fees as
part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
Code.83 Thus, the award of attorney’s fees is the exception rather than the rule.84 Attorney’s fees are
not awarded every time a party prevails in a suit because of the policy that no premium should be
placed on the right to litigate.85 We therefore delete the attorney’s fees awarded to Pajuyo.

We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did
not dispute this factual finding of the two courts. We find the amount reasonable compensation to
Pajuyo. The ₱300 monthly rental is counted from the last demand to vacate, which was on 16
February 1995.

WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-
96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon
City, Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of
attorney’s fees is deleted. No costs.

SO ORDERED.
G.R. No. 115324 February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,

vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision of the Court of Appeals dated June 25, 1991
1

in CA-G.R. CV No. 11791 and of its Resolution dated May 5, 1994, denying the motion for
2

reconsideration of said decision filed by petitioner Producers Bank of the Philippines.

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the
Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private
respondent to deposit in a bank a certain amount of money in the bank account of Sterela for
purposes of its incorporation. She assured private respondent that he could withdraw his money
from said account within a month’s time. Private respondent asked Sanchez to bring Doronilla to
their house so that they could discuss Sanchez’s request. 3

On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla’s
private secretary, met and discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two
Hundred Thousand Pesos (₱200,000.00) in favor of Sterela. Private respondent instructed his wife,
Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the
name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only
Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an
authorization letter from Doronilla authorizing Sanchez and her companions, "in coordination with
Mr. Rufo Atienza," to open an account for Sterela Marketing Services in the amount of ₱200,000.00.
In opening the account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A
passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives. 4

Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still
intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed
them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and
that only ₱90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said
remaining amount because it had to answer for some postdated checks issued by Doronilla.
According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla
opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings Account
No. 10-1567 for the amounts necessary to cover overdrawings in Current Account No. 10-0320. In
opening said current account, Sterela, through Doronilla, obtained a loan of ₱175,000.00 from the
Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings Account
No. 10-1567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned to
him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand
Pesos (₱212,000.00) in favor of private respondent. However, upon presentment thereof by private
respondent to the drawee bank, the check was dishonored. Doronilla requested private respondent
to present the same check on September 15, 1979 but when the latter presented the check, it was
again dishonored. 6

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for
the return of his client’s money. Doronilla issued another check for ₱212,000.00 in private
respondent’s favor but the check was again dishonored for insufficiency of funds. 7

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was
docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and
Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was
pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its
Decision in Civil Case No. 44485, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.

Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally –

(a) the amount of ₱200,000.00, representing the money deposited, with interest at the legal
rate from the filing of the complaint until the same is fully paid;

(b) the sum of ₱50,000.00 for moral damages and a similar amount for exemplary damages;

(c) the amount of ₱40,000.00 for attorney’s fees; and

(d) the costs of the suit.

SO ORDERED. 8

Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June 25,
1991, the appellate court affirmed in toto the decision of the RTC. It likewise denied with finality
9

petitioner’s motion for reconsideration in its Resolution dated May 5, 1994.10

On June 30, 1994, petitioner filed the present petition, arguing that –

I.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION

BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE
LOAN AND NOT ACCOMMODATION;

II.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S BANK

MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN
DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF
NATURAL JUSTICE;

III.

THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF

THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE
FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF
FACTS;

IV.

THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION
IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER
FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;

V.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE

LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH
THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE
SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR
EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND THE COSTS OF SUIT. 11

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to petitioner’s delay in furnishing
private respondent with copy of the reply and several substitutions of counsel on the part of private
12

respondent. On January 17, 2001, the Court resolved to give due course to the petition and required
13

the parties to submit their respective memoranda. Petitioner filed its memorandum on April 16, 2001
14

while private respondent submitted his memorandum on March 22, 2001.

Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private
respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous
as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the
amount of ₱212,000.00, or ₱12,000 more than what private respondent deposited in Sterela’s bank
account. Moreover, the fact that private respondent sued his good friend Sanchez for his failure to
15

recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a
business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private
respondent’s ₱200,000.00 because it is not privy to the transaction between the latter and
Doronilla. 16

It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for
allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronilla’s May 8, 1979 letter addressed to the
bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not contain any
authorization for these two to withdraw from said account. Hence, the authority to withdraw
therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone
had legal title to the savings account. Petitioner points out that no evidence other than the
17

testimonies of private respondent and Mrs. Vives was presented during trial to prove that private
respondent deposited his ₱200,000.00 in Sterela’s account for purposes of its incorporation. Hence,
18
petitioner should not be held liable for allowing Doronilla to withdraw from Sterela’s savings
account. 1a\^/phi1.net

Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision since the
findings of fact therein were not accord with the evidence presented by petitioner during trial to prove
that the transaction between private respondent and Doronilla was a mutuum, and that it committed
no wrong in allowing Doronilla to withdraw from Sterela’s savings account. 19

Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for
the actual damages suffered by private respondent, and neither may it be held liable for moral and
exemplary damages as well as attorney’s fees. 20

Private respondent, on the other hand, argues that the transaction between him and Doronilla is not
a mutuum but an accommodation, since he did not actually part with the ownership of his
21

₱200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so that a
certification can be issued to the effect that Sterela had sufficient funds for purposes of its
incorporation but at the same time, he retained some degree of control over his money through his
wife who was made a signatory to the savings account and in whose possession the savings
account passbook was given. 22

He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer, is
liable for the return of his money. He insists that Atienza, petitioner’s assistant manager, connived
with Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of
Sterela’s current account three days after Mrs. Vives and Sanchez opened a savings account with
petitioner for said company, as well as the approval of the authority to debit Sterela’s savings
account to cover any overdrawings in its current account. 23

There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for review
filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all
over again the evidence presented by the parties during trial. The Court’s jurisdiction is in principle
24

limited to reviewing errors of law that might have been committed by the Court of
Appeals. Moreover, factual findings of courts, when adopted and confirmed by the Court of Appeals,
25

are final and conclusive on this Court unless these findings are not supported by the evidence on
record. There is no showing of any misapprehension of facts on the part of the Court of Appeals in
26

the case at bar that would require this Court to review and overturn the factual findings of that court,
especially since the conclusions of fact of the Court of Appeals and the trial court are not only
consistent but are also amply supported by the evidence on record.

No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the
records reveals that the transaction between them was a commodatum. Article 1933 of the Civil
Code distinguishes between the two kinds of loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the
same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such
as money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the
parties is to lend consumable goods and to have the very same goods returned at the end of the
period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and
27

subsequent acts of the parties shall be considered in such determination. 28

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that
private respondent agreed to deposit his money in the savings account of Sterela specifically for the
purpose of making it appear "that said firm had sufficient capitalization for incorporation, with the
promise that the amount shall be returned within thirty (30) days." Private respondent merely
29

"accommodated" Doronilla by lending his money without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the transaction that the money would not be
removed from Sterela’s savings account and would be returned to private respondent after thirty (30)
days.

Doronilla’s attempts to return to private respondent the amount of ₱200,000.00 which the latter
deposited in Sterela’s account together with an additional ₱12,000.00, allegedly representing
interest on the mutuum, did not convert the transaction from a commodatum into a mutuum because
such was not the intent of the parties and because the additional ₱12,000.00 corresponds to the
fruits of the lending of the ₱200,000.00. Article 1935 of the Civil Code expressly states that "[t]he
bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only
proper for Doronilla to remit to private respondent the interest accruing to the latter’s money
deposited with petitioner.

Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the return of
private respondent’s money because it was not privy to the transaction between Doronilla and
private respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum,
has no bearing on the question of petitioner’s liability for the return of private respondent’s money
because the factual circumstances of the case clearly show that petitioner, through its employee Mr.
Atienza, was partly responsible for the loss of private respondent’s money and is liable for its
restitution.

Petitioner’s rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of
Sterela for Savings Account No. 10-1567 expressly states that—

"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority
duly authenticated, and neither a deposit nor a withdrawal will be permitted except upon the
production of the depositor savings bank book in which will be entered by the Bank the amount
deposited or withdrawn." 30

Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting
the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but
several times. Both the Court of Appeals and the trial court found that Atienza allowed said
withdrawals because he was party to Doronilla’s "scheme" of defrauding private respondent:

XXX

But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of the
defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the commission
of the fraud but he likewise helped in devising the means by which it can be done in such manner as
to make it appear that the transaction was in accordance with banking procedure.

To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza was
a key officer therein. The records show that plaintiff had suggested that the ₱200,000.00 be
deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that it
must be in defendant’s branch in Makati for "it will be easier for them to get a certification". In fact
before he was introduced to plaintiff, Doronilla had already prepared a letter addressed to the
Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings account
for Sterela in the amount of ₱200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant
Manager of the Bank x x x" (Exh. 1). This is a clear manifestation that the other defendants had been
in consultation with Atienza from the inception of the scheme. Significantly, there were testimonies
and admission that Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business
associate of Doronilla.1awphi1.nét

Then there is the matter of the ownership of the fund. Because of the "coordination" between
Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives
that the money belonged to her and her husband and the deposit was merely to accommodate
Doronilla. Atienza even declared that the money came from Mrs. Vives.

Although the savings account was in the name of Sterela, the bank records disclose that the only
ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the
signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia Vives
&/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of
savings deposits could only be made by persons whose authorized signatures are in the signature
cards on file with the bank. He, however, said that this procedure was not followed here because
Sterela was owned by Doronilla. He explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with Atienza. In the first place, he was all
the time aware that the money came from Vives and did not belong to Sterela. He was also told by
Mrs. Vives that they were only accommodating Doronilla so that a certification can be issued to the
effect that Sterela had a deposit of so much amount to be sued in the incorporation of the firm. In the
second place, the signature of Doronilla was not authorized in so far as that account is concerned
inasmuch as he had not signed the signature card provided by the bank whenever a deposit is
opened. In the third place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to
withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an
accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires the
presentation of the passbook. In this case, such recognized practice was dispensed with. The
transfer from the savings account to the current account was without the submission of the passbook
which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification signed by
Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original passbook
had been surrendered to the Makati branch in view of a loan accommodation assigning the savings
account (Exh. C). Atienza, who undoubtedly had a hand in the execution of this certification, was
aware that the contents of the same are not true. He knew that the passbook was in the hands of
Mrs. Vives for he was the one who gave it to her. Besides, as assistant manager of the branch and
the bank official servicing the savings and current accounts in question, he also was aware that the
original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was not
among those authorized to withdraw so her certification had no effect whatsoever.

The circumstance surrounding the opening of the current account also demonstrate that Atienza’s
active participation in the perpetration of the fraud and deception that caused the loss. The records
indicate that this account was opened three days later after the ₱200,000.00 was deposited. In spite
of his disclaimer, the Court believes that Atienza was mindful and posted regarding the opening of
the current account considering that Doronilla was all the while in "coordination" with him. That it was
he who facilitated the approval of the authority to debit the savings account to cover any
overdrawings in the current account (Exh. 2) is not hard to comprehend.

Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x. 31

Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold the
employer liable under this provision, it must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope of his assigned task when the act
complained of was committed. Case law in the United States of America has it that a corporation
32

that entrusts a general duty to its employee is responsible to the injured party for damages flowing
from the employee’s wrongful act done in the course of his general authority, even though in doing
such act, the employee may have failed in its duty to the employer and disobeyed the latter’s
instructions. 33

There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny
that Atienza was acting within the scope of his authority as Assistant Branch Manager when he
assisted Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-1567, in which
account private respondent’s money was deposited, and in transferring the money withdrawn to
Sterela’s Current Account with petitioner. Atienza’s acts of helping Doronilla, a customer of the
petitioner, were obviously done in furtherance of petitioner’s interests even though in the process,
34

Atienza violated some of petitioner’s rules such as those stipulated in its savings account
passbook. It was established that the transfer of funds from Sterela’s savings account to its current
35

account could not have been accomplished by Doronilla without the invaluable assistance of
Atienza, and that it was their connivance which was the cause of private respondent’s loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondent’s loss and is solidarily liable with Doronilla and
Dumagpi for the return of the ₱200,000.00 since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized withdrawals from Sterela’s savings account, and
that it was not negligent in the selection and supervision of Atienza. Accordingly, no error was
committed by the appellate court in the award of actual, moral and exemplary damages, attorney’s
fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals are AFFIRMED.SO ORDERED.

G.R. No. 141485 June 30, 2005

PABLITO MURAO and NELIO HUERTAZUELA, petitioners,.

vs.
PEOPLE OF THE PHILIPPINES, respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, petitioners pray for the
reversal of the Decision of the Court of Appeals in CA-G.R. CR No. 21134, dated 31 May
1999,1 affirming with modification the Judgment of the Regional Trial Court (RTC) of Puerto Princesa
City, Palawan, in Criminal Case No. 11943, dated 05 May 1997,2 finding petitioners guilty beyond
reasonable doubt of the crime of estafa under Article 315(1)(b) of the Revised Penal Code.

Petitioner Pablito Murao is the sole owner of Lorna Murao Industrial Commercial Enterprises
(LMICE), a company engaged in the business of selling and refilling fire extinguishers, with branches
in Palawan, Naga, Legaspi, Mindoro, Aurora, Quezon, Isabela, and Laguna. Petitioner Nelio
Huertazuela is the Branch Manager of LMICE in Puerto Princesa City, Palawan.3

On 01 September 1994, petitioner Murao and private complainant Chito Federico entered into a
Dealership Agreement for the marketing, distribution, and refilling of fire extinguishers within Puerto
Princesa City.4 According to the Dealership Agreement, private complainant Federico, as a dealer for
LMICE, could obtain fire extinguishers from LMICE at a 50% discount, provided that he sets up his
own sales force, acquires and issues his own sales invoice, and posts a bond with LMICE as
security for the credit line extended to him by LMICE. Failing to comply with the conditions under the
said Dealership Agreement, private complainant Federico, nonetheless, was still allowed to act as a
part-time sales agent for LMICE entitled to a percentage commission from the sales of fire
extinguishers.5

The amount of private complainant Federico’s commission as sales agent for LMICE was under
contention. Private complainant Federico claimed that he was entitled to a commission equivalent to
50% of the gross sales he had made on behalf of LMICE,6 while petitioners maintained that he
should receive only 30% of the net sales. Petitioners even contended that as company policy, part-
time sales agents were entitled to a commission of only 25% of the net sales, but since private
complainant Federico helped in establishing the LMICE branch office in Puerto Princesa City, he
was to receive the same commission as the full-time sales agents of LMICE, which was 30% of the
net sales.7

Private complainant Federico’s first successful transaction as sales agent of LMICE involved two fire
extinguishers sold to Landbank of the Philippines (Landbank), Puerto Princesa City Branch, for the
price of ₱7,200.00. Landbank issued a check, dated 08 November 1993, pay to the order of "L.M.
Industrial Comm’l. Enterprises c/o Chito Federico," for the amount of ₱5,936.40,8 after deducting
from the original sales price the 15% discount granted by private complainant Federico to Landbank
and the 3% withholding tax. Private complainant Federico encashed the check at Landbank and
remitted only ₱2,436.40 to LMICE, while he kept ₱3,500.00 for himself as his commission from the
sale.9
Petitioners alleged that it was contrary to the standard operating procedure of LMICE that private
complainant Federico was named payee of the Landbank check on behalf of LMICE, and that
private complainant Federico was not authorized to encash the said check. Despite the supposed
irregularities committed by private complainant Federico in the collection of the payment from
Landbank and in the premature withholding of his commission from the said payment, petitioners
forgave private complainant Federico because the latter promised to make-up for his misdeeds in
the next transaction.10

Private complainant Federico, on behalf of LMICE, subsequently facilitated a transaction with the
City Government of Puerto Princesa for the refill of 202 fire extinguishers. Because of the
considerable cost, the City Government of Puerto Princesa requested that the transaction be split
into two purchase orders, and the City Government of Puerto Princesa shall pay for each of the
purchase orders separately.11 Pursuant to the two purchase orders, LMICE refilled and delivered all
202 fire extinguishers to the City Government of Puerto Princesa: 154 units on 06 January 1994, 43
more units on 12 January 1994, and the last five units on 13 January 1994.12

The subject of this Petition is limited to the first purchase order, Purchase Order No. GSO-856,
dated 03 January 1994, for the refill of 99 fire extinguishers, with a total cost of ₱309,000.00.13 On 16
June 1994, the City Government of Puerto Princesa issued Check No. 611437 to LMICE to pay for
Purchase Order No. GSO-856, in the amount of ₱300,572.73, net of the 3% withholding tax.14 Within
the same day, petitioner Huertazuela claimed Check No. 611437 from the City Government of
Puerto Princesa and deposited it under the current account of LMICE with PCIBank.15

On 17 June 1994, private complainant Federico went to see petitioner Huertazuela at the LMICE
branch office in Puerto Princesa City to demand for the amount of ₱154,500.00 as his commission
from the payment of Purchase Order No. GSO-856 by the City Government of Puerto Princesa.
Petitioner Huertazuela, however, refused to pay private complainant Federico his commission since
the two of them could not agree on the proper amount thereof.16

Also on 17 June 1994, private complainant Federico went to the police station to file an Affidavit-
Complaint for estafa against petitioners.17 Petitioners submitted their Joint Counter-Affidavit on 12
July 1994.18 The City Prosecution Office of Puerto Princesa City issued a Resolution, dated 15
August 1994, finding that a prima facie case for estafa existed against the petitioners and
recommending the filing of an information for estafa against both of them.19

The Information, docketed as Criminal Case No. 11943 and raffled to the RTC of Puerto Princesa
City, Palawan, Branch 52, reads as follows –

INFORMATION

The undersigned accuses PABLITO MURAO and NELIO C. HUERTAZUELA of the crime of
ESTAFA, committed as follows:

That on or about the 16th day of June, 1994, at Puerto Princesa City, Philippines, and within the
jurisdiction of this Honorable Court, the said accused, conspiring and confederating together and
mutually helping one another, after having received the amount of ₱309,000.00 as payment of the
99 tanks of refilled fire extinguisher (sic) from the City Government of Puerto Princesa, through
deceit, fraud and misrepresentation, did then and there willfully, unlawfully and feloniously defraud
one Chito Federico in the following manner, to wit: said accused, well knowing that Chito Federico
agent of LM Industrial Commercial Enterprises is entitled to 50% commission of the gross sales as
per their Dealership Contract or the amount of ₱154,500.00 as his commission for his sale of 99
refilled fire extinguishers worth ₱309,000.00, and accused once in possession of said amount of
₱309,000.00 misappropriate, misapply and convert the amount of ₱154,500.00 for their own
personal use and benefit and despite repeated demands made upon them by complainant to deliver
the amount of ₱154,500.00, accused failed and refused and still fails and refuses to do so, to the
damage and prejudice of said Chito Federico in the amount of ₱154,500.00, Philippine Currency.20

After holding trial, the RTC rendered its Judgment on 05 May 1997 finding petitioners guilty beyond
reasonable doubt as co-principals of the crime of estafa defined and penalized in Article 315(1)(b) of
the Revised Penal Code. Estafa, under the said provision, is committed by –

ART. 315. Swindling (estafa). – Any person who shall defraud another by any of the means
mentioned hereinbelow . . .

1. With unfaithfulness or abuse of confidence, namely:

(a) …

(b) By misappropriating or converting, to the prejudice of another, money, goods, or any

other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or partially guaranteed by a bond; or
by denying having received such money, goods, or other property; . . .

In the same Judgment, the RTC expounded on its finding of guilt, thus –

For the afore-quoted provision of the Revised Penal Code to be committed, the following requisites
must concur:

1. That money, goods or other personal property be received by the offender in trust, or on
commission, or for administration, or under any other obligation involving the duty to make
delivery of, or to return, the same;

2. That there be misappropriation or conversion of such money or property by the offender,

or denial on his part of such receipt;

3. That such misappropriation or conversion or denial is to the prejudice of another; and

4. That there is demand made by the offended party to the offender. (Reyes, Revised Penal
Code of the Philippines, p. 716; Manuel Manahan, Jr. vs. Court of Appeals, Et Al., G.R. No.
111656, March 20, 1996)

All the foregoing elements are present in this case. The aborted testimony of Mrs. Norma Dacuan,
Cashier III of the Treasurer’s Office of the City of Puerto Princesa established the fact that indeed,
on June 16, 1994, co-accused Nelio Huertazuela took delivery of Check No. 611437 with face value
of ₱300,572.73, representing payment for the refill of 99 cylinders of fire extinguishers. Although the
relationship between complaining witness Chito Federico and LMIC is not fiduciary in nature, still the
clause "any other obligation involving the duty to make delivery of or to return" personal property is
broad enough to include a "civil obligation" (Manahan vs. C.A., Et. Al., Mar. 20, 1996).

The second element cannot be gainsaid. Both Pablito Murao and Nelio Huertazuela categorically
admitted that they did not give to Chito Federico his commission. Instead, they deposited the full
amount of the consideration, with the PCIBank in the Current Account of LMIC.
…

The refusal by the accused to give Chito Federico what ever percentage his commission necessarily
caused him prejudice which constitute the third element of estafa. Demand for payment, although
not an essential element of estafa was nonetheless made by the complainant but was rebuffed by
the accused. The fraudulent intent by the accused is indubitably indicated by their refusal to pay
Chito Federico any percentage of the gross sales as commission. If it were true that what the
dealer/sales Agent is entitled to by way of commission is only 30% of the gross sales, then by all
means the accused should have paid Chito Federico 30%. If he refused, they could have it
deposited in his name. In that way they may not be said to have misappropriated for themselves
what pertained to their Agent by way of commission.

WHEREFORE, premises considered judgment is hereby rendered finding the accused PABLITO
MURAO and NELIO HUERTAZUELA guilty beyond reasonable doubt as co-principals, of the crime
of estafa defined and penalized in Article 315 par. 1(b) of the Revised Penal Code, and applying the
provisions of the Indeterminate Sentence Law, both accused are hereby sentenced to an
indeterminate penalty ranging from a minimum of TWO (2) YEARS, FOUR (4) MONTHS and ONE
(1) DAY of prision correccional in its medium period, to a maximum of TWENTY (20) YEARS of
reclusion temporal in its maximum period; to pay Chito Federico, jointly and severally:

a. Sales Commission equivalent to

50% of ₱309,000.00 or ------------------- ₱154,500.00

with legal interest thereon from

June 17, 1994 until fully paid;

b. Attorney’s fees ---------------------------- ₱ 30,0000.00.21

Resolving the appeal filed by the petitioners before it, the Court of Appeals, in its Decision, dated 31
May 1999, affirmed the aforementioned RTC Judgment, finding petitioners guilty of estafa, but
modifying the sentence imposed on the petitioners. The dispositive portion of the Decision of the
Court of Appeals reads –

WHEREFORE, the appealed decision is hereby AFFIRMED with the MODIFICATION that
appellants PABLITO MURAO and NELIO HUERTAZUELA are hereby each sentenced to an
indeterminate penalty of eight (8) years and One (1) day of prision mayor, as minimum, to Twenty
(20) years of reclusion temporal, as maximum. The award for attorney’s fee of ₱30,000.00 is deleted
because the prosecution of criminal action is the task of the State prosecutors. All other aspects of
the appealed decision are maintained.22

When the Court of Appeals, in its Resolution, dated 19 January 2000,23 denied their Motion for
Reconsideration, petitioners filed the present Petition for Review24 before this Court, raising the
following errors allegedly committed by the Court of Appeals in its Decision, dated 31 May 1999 –

I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT
RULED THAT PETITIONERS ARE LIABLE FOR ESTAFA UNDER ARTICLE 315 1(B) OF THE
REVISED PENAL CODE UNDER THE FOREGOING SET OF FACTS, WHEN IT IS CLEAR FROM
THE SAID UNDISPUTED FACTS THAT THE LIABILITY IS CIVIL IN NATURE.

II

WITH DUE RESPECT, THE HONORABLE COURT ERRED WHEN IT UPHOLD (sic) PRIVATE
COMPLAINANT’S CLAIM THAT HE IS ENTITLED TO A FIFTY (50%) PERCENT COMMISSION
WITHOUT EVIDENCE TO SUPPORT SUCH CLAIM.

This Court finds the instant Petition impressed with merit. Absent herein are two essential elements
of the crime of estafa by misappropriation or conversion under Article 315(1)(b) of the Revised Penal
Code, namely: (1) That money, goods or other personal property be received by the offender in trust,
or on commission, or for administration, or under any other obligation involving the duty to make
delivery of, or to return, the same; and (2) That there be a misappropriation or conversion of such
money or property by the offender.

The findings of the RTC and the Court of Appeals that petitioners committed estafa rest on the
erroneous belief that private complainant Federico, due to his right to commission, already owned
50% of the amount paid by the City Government of Puerto Princesa to LMICE by virtue of Check No.
611437, so that the collection and deposit of the said check by petitioners under the account of
LMICE constituted misappropriation or conversion of private complainant Federico’s commission.

However, his right to a commission does not make private complainant Federico a joint
owner of the money paid to LMICE by the City Government of Puerto Princesa, but merely
establishes the relation of agent and principal.25 It is unequivocal that an agency existed between
LMICE and private complainant Federico. Article 1868 of the Civil Code defines agency as a special
contract whereby "a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter." Although private
complainant Federico never had the opportunity to operate as a dealer for LMICE under the terms of
the Dealership Agreement, he was allowed to act as a sales agent for LMICE. He can negotiate for
and on behalf of LMICE for the refill and delivery of fire extinguishers, which he, in fact, did on two
occasions – with Landbank and with the City Government of Puerto Princesa. Unlike the Dealership
Agreement, however, the agreement that private complainant Federico may act as sales agent of
LMICE was based on an oral agreement.26

As a sales agent, private complainant Federico entered into negotiations with prospective clients for
and on behalf of his principal, LMICE. When negotiations for the sale or refill of fire extinguishers
were successful, private complainant Federico prepared the necessary documentation. Purchase
orders, invoices, and receipts were all in the name of LMICE. It was LMICE who had the primary
duty of picking up the empty fire extinguishers, filling them up, and delivering the refilled tanks to the
clients, even though private complainant Federico personally helped in hauling and carrying the fire
extinguishers during pick-up from and delivery to clients.

All profits made and any advantage gained by an agent in the execution of his agency should belong
to the principal.27 In the instant case, whether the transactions negotiated by the sales agent were for
the sale of brand new fire extinguishers or for the refill of empty tanks, evidently, the business
belonged to LMICE. Consequently, payments made by clients for the fire extinguishers pertained to
LMICE. When petitioner Huertazuela, as the Branch Manager of LMICE in Puerto Princesa City, with
the permission of petitioner Murao, the sole proprietor of LMICE, personally picked up Check No.
611437 from the City Government of Puerto Princesa, and deposited the same under the Current
Account of LMICE with PCIBank, he was merely collecting what rightfully belonged to LMICE.
Indeed, Check No. 611437 named LMICE as the lone payee. Private complainant Federico may
claim commission, allegedly equivalent to 50% of the payment received by LMICE from the City
Government of Puerto Princesa, based on his right to just compensation under his agency contract
with LMICE,28 but not as the automatic owner of the 50% portion of the said payment.

Since LMICE is the lawful owner of the entire proceeds of the check payment from the City
Government of Puerto Princesa, then the petitioners who collected the payment on behalf of LMICE
did not receive the same or any part thereof in trust, or on commission, or for administration, or
under any other obligation involving the duty to make delivery of, or to return, the same to private
complainant Federico, thus, the RTC correctly found that no fiduciary relationship existed between
petitioners and private complainant Federico. A fiduciary relationship between the complainant and
the accused is an essential element of estafa by misappropriation or conversion, without which the
accused could not have committed estafa.29

The RTC used the case of Manahan, Jr. v. Court of Appeals30 to support its position that even in the
absence of a fiduciary relationship, the petitioners still had the civil obligation to return and deliver to
private complainant Federico his commission. The RTC failed to discern the substantial differences
in the factual background of the Manahan case from the present Petition. The Manahan case
involved the lease of a dump truck. Although a contract of lease may not be fiduciary in character,
the lessee clearly had the civil obligation to return the truck to the lessor at the end of the lease
period; and failure of the lessee to return the truck as provided for in the contract may constitute
estafa. The phrase "or any other obligation involving the duty to make delivery of, or to return the
same" refers to contracts of bailment, such as, contract of lease of personal property, contract of
deposit, and commodatum, wherein juridical possession of the thing was transferred to the lessee,
depositary or borrower, and wherein the latter is obligated to return the same thing.31

In contrast, the current Petition concerns an agency contract whereby the principal already received
payment from the client but refused to give the sales agent, who negotiated the sale, his
commission. As has been established by this Court in the foregoing paragraphs, LMICE had a right
to the full amount paid by the City Government of Puerto Princesa. Since LMICE, through
petitioners, directly collected the payment, then it was already in possession of the amount, and no
transfer of juridical possession thereof was involved herein. Given that private complainant Federico
could not claim ownership over the said payment or any portion thereof, LMICE had nothing at all to
deliver and return to him. The obligation of LMICE to pay private complainant Federico his
commission does not arise from any duty to deliver or return the money to its supposed owner, but
rather from the duty of a principal to give just compensation to its agent for the services rendered by
the latter.

Furthermore, the Court of Appeals, in its Decision, dated 31 May 1999, defined the words "convert"
and "misappropriate" in the following manner –

The High Court in Saddul v. Court of Appeals [192 SCRA 277] enunciated that the words "convert"
and "misappropriate" in the crime of estafa punished under Art. 315, par. 1(b) connote an act of
using or disposing of another’s property as if it were one’s own, or if devoting it to a purpose or use
different from that agreed upon. To misappropriate to one’s use includes, not only conversion to
one’s personal advantage, but also every attempt to dispose of the property of another without
right.32

Based on the very same definition, this Court finds that petitioners did not convert nor
misappropriate the proceeds from Check No. 611437 because the same belonged to LMICE, and
was not "another’s property." Petitioners collected the said check from the City Government of
Puerto Princesa and deposited the same under the Current Account of LMICE with PCIBank. Since
the money was already with its owner, LMICE, it could not be said that the same had been
converted or misappropriated for one could not very well fraudulently appropriate to himself money
that is his own.33

Although petitioners’ refusal to pay private complainant Federico his commission caused prejudice
or damage to the latter, said act does not constitute a crime, particularly estafa by conversion or
misappropriation punishable under Article 315(1)(b) of the Revised Penal Code. Without the
essential elements for the commission thereof, petitioners cannot be deemed to have committed the
crime.

While petitioners may have no criminal liability, petitioners themselves admit their civil liability to the
private complainant Federico for the latter’s commission from the sale, whether it be 30% of the net
sales or 50% of the gross sales. However, this Court is precluded from making a determination and
an award of the civil liability for the reason that the said civil liability of petitioners to pay private
complainant Federico his commission arises from a violation of the agency contract and not from a
criminal act.34 It would be improper and unwarranted for this Court to impose in a criminal action the
civil liability arising from a civil contract, which should have been the subject of a separate and
independent civil action.35

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CR No. 21134, dated 31
May 1999, affirming with modification the Judgment of the RTC of Puerto Princesa City, Palawan, in
Criminal Case No. 11943, dated 05 May 1997, finding petitioners guilty beyond reasonable doubt of
estafa by conversion or misappropriation under Article 315(1)(b) of the Revised Penal Code, and
awarding the amount of ₱154,500.00 as sales commission to private complainant Federico, is
hereby REVERSED and SET ASIDE. A new Judgment is hereby entered ACQUITTING petitioners
based on the foregoing findings of this Court that their actions did not constitute the crime of estafa
by conversion or misappropriation under Article 315(1)(b) of the Revised Penal Code. The cash
bonds posted by the petitioners for their provisional liberty are hereby ordered RELEASED and the
amounts thereof RETURNED to the petitioners, subject to the usual accounting and auditing
procedures.

SO ORDERED.
G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be
considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division
of Respondent Court of Appeals in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R.
1

No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the
Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and
Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as
follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar

Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357
to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of
plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said
defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in
the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question;
that the two lots were possessed by the predecessors-in-interest of private respondents under claim
of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots
as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for eleven years, hence
there is no possibility of acquisitive prescription which requires 10 years possession with just title
and 30 years of possession without; that the principle of res judicata on these findings by the Court
of Appeals will bar a reopening of these questions of facts; and that those facts may no longer be
altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic of
the Mountain Province (VICAR for brevity) filed with the Court of First
Instance of Baguio Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at
Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said
Lots being the sites of the Catholic Church building, convents, high
school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the
Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots
Nos. 2 and 3, respectively, asserting ownership and title thereto. After
trial on the merits, the land registration court promulgated its
Decision, dated November 17, 1965, confirming the registrable title of
VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655)
and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case
No. 3607) appealed the decision of the land registration court to the
then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court
of Appeals rendered its decision, dated May 9, 1977, reversing the
decision of the land registration court and dismissing the VICAR's
application as to Lots 2 and 3, the lots claimed by the two sets of
oppositors in the land registration case (and two sets of plaintiffs in
the two cases now at bar), the first lot being presently occupied by
the convent and the second by the women's dormitory and the
sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for

reconsideration praying the Court of Appeals to order the registration
of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May
17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their
motion for reconsideration praying that both Lots 2 and 3 be ordered
registered in the names of the Heirs of Juan Valdez and Pacita
Valdez. On August 12,1977, the Court of Appeals denied the motion
for reconsideration filed by the Heirs of Juan Valdez on the ground
that there was "no sufficient merit to justify reconsideration one way
or the other ...," and likewise denied that of the Heirs of Egmidio
Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for
review on certiorari of the decision of the Court of Appeals dismissing
his (its) application for registration of Lots 2 and 3, docketed as G.R.
No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain
Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for

reconsideration the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez
 and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio
Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute

resolution both petitions (of VICAR on the one hand and the Heirs of
Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon
the finality of both Supreme Court resolutions in G.R. No. L-46832
and G.R. No. L- 46872, the Heirs of Octaviano filed with the then
Court of First Instance of Baguio, Branch II, a Motion For Execution of
Judgment praying that the Heirs of Octaviano be placed in
possession of Lot 3. The Court, presided over by Hon. Salvador J.
Valdez, on December 7, 1978, denied the motion on the ground that
the Court of Appeals decision in CA-G.R. No. 38870 did not grant the
Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of

Appeals a petitioner for certiorari and mandamus, docketed as CA-
G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon.
Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979,
the Court of Appeals dismissed the petition.

It was at that stage that the instant cases were filed. The Heirs of
Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979,
for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed
Civil Case No. 3655 (429) on September 24, 1979, likewise for
recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership
of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano
(Exh. C ); his written demand (Exh. B—B-4 ) to defendant Vicar for the return of the
land to them; and the reasonable rentals for the use of the land at P10,000.00 per
month. On the other hand, defendant Vicar presented the Register of Deeds for the
Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is
not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs
(Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur
when the plaintiffs admitted that the witness if called to the witness stand, would
testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75)
years continuously and peacefully and has constructed permanent structures
thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of
Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect
declared the plaintiffs the owners of the land constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from
setting up the defense of ownership and/or long and continuous possession of the
two lots in question since this is barred by prior judgment of the Court of Appeals in
CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the
question of possession and ownership have already been determined by the Court of
Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme
 Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar
maintains that the principle of res judicata would not prevent them from litigating the
issues of long possession and ownership because the dispositive portion of the prior
judgment in CA-G.R. No. 038830-R merely dismissed their application for registration
and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion
of the decision, and not its body, is the controlling pronouncement of the Court of
Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE
ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM

VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS
WERE VALDEZ AND OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO

WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS
AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT
APPLICATIONS SINCE 1906;

6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST
TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE
CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO.
038830 WAS AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON

OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR
PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP
IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3

MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH
WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY
AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149,
when it clearly held that it was in agreement with the findings of the trial court that the Decision of the
Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2
and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively
declare private respondents as owners of the land, neither was it declared that they were not owners
of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and
3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower
in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for
taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires
possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30
years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-
G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that
said findings are res judicata between the parties. They can no longer be altered by presentation of
evidence because those issues were resolved with finality a long time ago. To ignore the principle
of res judicata would be to open the door to endless litigations by continuous determination of issues
without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division in CA-G.R. No.
5

38830-R, shows that it reversed the trial court's Decision finding petitioner to be entitled to register
6

the lands in question under its ownership, on its evaluation of evidence and conclusion of facts.

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years
possession for ordinary acquisitive prescription because of the absence of just title. The appellate
court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by
purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar
because there was absolutely no documentary evidence to support the same and the alleged
purchases were never mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both
Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of
private respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.

There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots
2 and 3, because the buildings standing thereon were only constructed after liberation in 1945.
Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots
1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was
constructed only in 1951 and the new convent only 2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot
from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner
Vicar after the church and the convent were destroyed. They never asked for the return of the
house, but when they allowed its free use, they became bailors in commodatum and the petitioner
the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject matter
of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for
taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by
way of ordinary acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee
in commodatum; and that the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-
R. Its findings of fact have become incontestible. This Court declined to review said decision,
thereby in effect, affirming it. It has become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of
discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is
governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No.
05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may
no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit,
the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of
Appeals is AFFIRMED, with costs against petitioner.

SO ORDERED.
G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in
the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the
furniture be paid pro rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture
described in the third paragraph of the stipulation of facts, subject to the condition that the defendant
would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria
Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the
conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of
lease. There after the plaintiff required the defendant to return all the furniture transferred to him for
them in the house where they were found. On November 5, 1936, the defendant, through
another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor
of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas heaters and the four electric lamps because he
would use them until the 15th of the same month when the lease in due to expire. The plaintiff
refused to get the furniture in view of the fact that the defendant had declined to make delivery of all
of them. On November 15th, before vacating the house, the defendant deposited with the
Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse
situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when
the defendant placed them at their disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they should get all the furniture from the
Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in denying the motions
for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.
lawphi1.net

The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house.
The defendant did not comply with this obligation when he merely placed them at the disposal of the
plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of
article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof
by the defendant in case of his inability to return some of the furniture because under paragraph 6 of
the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff,
in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the
furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be
occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of
the defendant. the defendant shall pay the costs in both instances. So ordered.