What is the redemption price in case of accommodation mortgagors?

Accommodation mortgagors are not liable for the payment of the loan of the debtor. The
liability of the accommodation mortgagors extends only up to the loan value of their mortgaged
property and not to the entire loan itself. Hence, it is only just that they be allowed to redeem
their mortgaged property by paying only the winning bid price thereof (plus interest thereon) at
the public auction sale. (Belo v. PNB, G.R. No. 134330, Mar. 1, 2001)

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO

v.  PHILIPPINE NATIONALBANK and SPOUSES MARCOS and ARSENIA ESLABONG.R. No.
134330, 1 March 2001, SECOND DIVISION (De Leon, Jr.,

Eduarda Belo owned an agricultural land which she leased to spouses Marcos and Arsenia
Eslabon in connection with the said spouses’ sugar plantation business. To finance their
business venture, the spouses Eslabon obtained a loan from Philippine National Bank (PNB)
secured by a real estate mortgage on their own four residential houses as well as on the
agricultural land owned by Eduarda, the latter’s consent was obtained through a Special Power
of Attorney (SPA) executed by Eduarda in favour of the spouses which would in effect make
Eduarda as an accommodation mortgagor. The spouses Eslabon failed to pay their
loanobligation, thus extrajudicial foreclosure proceedings were taken against the properties
whereby PNBemerged as the highest bidder. PNB informed Eduarda of the sale and the latter’s
one year period to redeem the land. Eduarda eventually sold her right of redemption to
spouses Enrique and Florencia Belo. The latterspouses tendered payment for the redemption of
the agricultural land equivalent to the amount of the bidprice of PNB plus interest and
expenses. PNB rejected the tender of payment contending that theredemption price should be
the total claim of the bank on the date of the auction sale and custody ofproperty plus charges
and accrued interests.

ISSUE:
 Whether the spouses Belo can be made to pay as redemption price the total claim of PNB
on thedate of the auction sale

HELD:
No. An accommodation mortgage is not necessarily void simply because the
accommodationmortgagor did not benefit from the same. The validity of an accommodation
mortgage is allowed under
 Article 2085 of the New Civil Code which provides that “(t)hird persons who are not parties to
the principalobligation may secure the latter by pledging or mortgaging their own property.”
 An accommodationmortgagor, ordinarily, is not himself a recipient of the loan, otherwise that
would be contrary to hisdesignation as such. It is not always necessary that the accommodation
mortgagor be appraised beforehand ofthe entire amount of the loan nor should it first be
determined before the execution of the SPA.On the other hand, respondent PNB has no claim
against accommodation mortgagor Eduarda Beloinasmuch as she only mortgaged her property
to accommodate the Eslabon spouses who are the loanborrowers of the PNB. The principal
contract is the contract of loan between the Eslabon spouses, asborrowers/debtors, and the
PNB as lender. The accommodation real estate mortgage (which secures theloan) is only an
accessory contract. It is our view
and we hold that the term “mortgagor” in Section 25 of P.D. No. 694 pertains only to a debtor
mortgagor and not to an accommodation mortgagor.On the other hand, accommodation
mortgagors as such are not in anyway liable for the payment ofthe loan or principal obligation
of the debtor/borrower. The liability of the accommodation mortgagorsextends only up to the
loan value of their mortgaged property and not to the entire loan itself. Hence, it isonly just
that they be allowed to redeem their mortgaged property by paying only the winning bid
pricethereof (plus interest thereon) at the public auction sale.
SPS. FRANCISCO SIERRA v. PAIC SAVINGS +

PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] is the Decision[2] dated June 27, 2011
of the Court of Appeals (CA) in CA-G.R. CV No. 91999 which reversed and set aside the
Decision[3] dated April 24, 2006 of the Regional Trial Court of Antipolo City, Branch 74
(RTC) in Civil Case No. 91-2153, dismissing petitioners' complaint for declaration of
nullity of real estate mortgage and extrajudicial foreclosure proceedings.

The Facts

On May 31, 1983, Goldstar Conglomerates, Inc. (GCI), represented by Guillermo

Zaldaga (Zaldaga), obtained from First Summa Savings and Mortgage Bank (Summa
Bank), now respondent Paic Savings and Mortgage Bank, Inc. (PSMB), [4] a loan in the
amount of  P1,500,000.00 as evidenced by a Loan Agreement[5] dated May 31, 1983. As
security therefor, GCI executed in favor of PSMB six (6) promissory notes [6] in the
aggregate amount of P1,500,000.00 as well as a Deed of Real Estate Mortgage over a
parcel of land covered by Transfer Certificate of Title (TCT) No. 308475. [7] As additional
security, petitioners Francisco Sierra, Rosario Sierra, and Spouses Felix Gatlabayan and
Salome Sierra mortgaged four (4) parcels of land in Antipolo City, covered by TCT Nos.
308476, 308477, 308478, and 308479,[8] and respectively registered in their names
(subject properties). Records show that after the signing of the mortgage deed, Zaldaga
gave petitioner Francisco Sierra[9] four (4) manager's checks with an aggregate amount
of P200,000.00, which were later successfully encashed, [10] as well as several post-dated
checks.[11]

Eventually, GCI defaulted in the payment of its loan to PSMB, thereby prompting the
latter to extrajudicially foreclose the mortgage on the subject properties in accordance
with Act No. 3135,[12] as amended, with due notice to petitioners.[13] In the process, PSMB
emerged as the highest bidder in the public auction sale held on June 27, 1984 for a total
bid price of P2,467,272.66.[14] Since petitioners failed to redeem the subject properties
within the redemption period, their certificates of title were cancelled and new ones
were issued in PSMB's name.[15]

On September 16, 1991, petitioners filed a complaint[16] for the declaration of nullity of

the real estate mortgage and its extrajudicial foreclosure, and damages against PSMB
and Summa Bank before the RTC, docketed as Civil Case No. 91-2153.

In the said complaint, petitioners averred that under pressing need of money, with very
limited education and lacking proper instructions, they fell prey to a group who
misrepresented to have connections with Summa Bank and, thus, could help them
secure a loan.[17] They were made to believe that they applied for a loan, the proceeds of
which would be released through checks drawn against Summa Bank. [18] Relying in good
faith on the checks[19] issued to them, petitioners unsuspectingly signed a document
denominated as Deed of Real Estate Mortgage (subject deed), couched in highly
technical legal terms, which was not interpreted in a language/dialect known to them,
and which was not accompanied by the loan documents. However, when they presented
for payment the earliest-dated checks to the drawee bank, the same were dishonored for
the reason "Account Closed." Upon confrontation, some members of the group assured
petitioners that there was only a misunderstanding and that their certificates of titles
would be returned.[20] Subsequently, petitioners learned that: (a) the loan account
secured by the real estate mortgage was in the name of another person and not in their
names as they were made to understand; (b) despite lack of special authority from them,
foreclosure proceedings over the subject properties were initiated by PSMB and not
Summa Bank in whose favor the mortgage was executed; (c) the period of redemption
had already lapsed; and (d) the ownership over the subject properties had already been
consolidated in the name of PSMB.[21] Petitioners likewise lamented that they were not
furnished copies of the loan and mortgage documents, or notified/apprised of the
assignment to PSMB, rendering them unable to comply with their obligations under the
subject deed. They further claimed that they were not furnished a copy of the statement
of account, which was bloated with unconscionable and unlawful charges, assessments,
and fees, nor a copy of the petition for foreclosure prior to the precipitate extrajudicial
foreclosure and auction sale which failed to comply with the posting and notice
requirements.[22] In light of the foregoing, petitioners prayed that the real estate
mortgage and the subsequent foreclosure proceedings, and all derivative titles and
rights arising therefrom be declared null and void ab initio, and that the subject
properties be reconveyed back to them, with further prayer for compensatory and
exemplary damages, and attorney's fees.[23]
PSMB filed its answer,[24] averring that PSMB and Summa Bank are one and the same
entity.[25] It prayed for the dismissal of the complaint, claiming that petitioners have no
cause of action against it because it never extended any loan to them.[26] PSMB
maintained that: (a) it acted in good faith with respect to the subject transactions and
that petitioners' action should be directed against the group who deceived them; [27] (b)
the subject properties were mortgaged to secure an obligation covered by the loan
agreement with GCI;[28] (c) the mortgage was valid, having been duly signed by
petitioners before a notary public;[29] (d) the foreclosure proceedings were regular,
having complied with the formalities required by law;[30] and (e) petitioners allowed time
to pass without pursuing their purported right against Summa Bank and/or PSMB.
[31]
 PSMB thereby interposed a counterclaim for compensatory, moral and exemplary
damages, and attorney's fees for the baseless suit. [32]

The RTC Ruling

In a Decision[33] dated April 24, 2006, the RTC: (a) declared the subject deed and the
extrajudicial foreclosure proceedings null and void; (b) cancelled the certificates of title
of PSMB; and (c) directed the reinstatement of petitioners' certificates of title. [34]
While the RTC ruled that the loan transaction was a valid and binding agreement
between Summa Bank and GCI, it held that the subject deed did not reflect the true
intent and agreement between Summa Bank and petitioners who were made to believe
that they were the principal obligors in the loan, thereby invalidating their consent to
the mortgage.[35] It likewise held that petitioners cannot be faulted for failing to heed the
notice of extrajudicial foreclosure sale by PSMB considering their lack of notice that
Summa Bank had changed its name to PSMB.[36]

Nonetheless, considering that petitioners had received partial loan proceeds of

P200,000.00, the RTC held them liable for such amount and accordingly directed
PSMB to (a) allow petitioners to pay for their loan in the amount of P200,000.00 plus
12% interest, and (b) pay moral and exemplary damages, attorney's fees, and the costs of
suit.[37]

Aggrieved, PSMB filed a motion for reconsideration,[38] while petitioners filed a motion

for discretionary execution[39] which were, however, denied in an Order[40] dated
February 11, 2008. Dissatisfied, PSMB interposed an appeal to the CA.

The CA Ruling

In a Decision[41] dated June 27, 2011, the CA reversed and set aside the RTC Decision
and dismissed petitioners' complaint for lack of merit. [42]

It held that petitioners were not able to sufficiently prove their claim that they were
uneducated and/or unschooled, rejecting the self-serving and uncorroborated testimony
of petitioner Francisco Sierra on such claim. [43] In this relation, it pointed out that
petitioners had knowingly and voluntarily executed the subject deed, observing that: (a)
prior to its execution, petitioners Francisco and Rosario Sierra had previously
mortgaged their properties twice to the Rural Bank of Antipolo, showing that they were
familiar with the intricacies of obtaining a loan and of the terms and conditions of a
mortgage, and (b) the page on which the parties affixed their signatures clearly indicated
petitioners as the mortgagors and GCI as the borrowers. Moreover, petitioners did not
demand for the release of the remaining amount of their alleged loan, raising issue
thereon only in their complaint filed in 1991.[44]

The CA likewise ruled that the action to annul the subject deed had already prescribed,
since the same was brought more than four (4) years from the discovery of the mistake
or fraud, reckoned from the time the earliest checks issued to petitioners were
dishonored, or on January 9, 1984, this being the time the consideration or price for the
execution of the subject deed turned out to be false.[45]

The CA further held that petitioners were barred by laches from asserting any claim on
the subject properties considering that despite receipt of the letter dated June 11, 1984
informing them of the scheduled auction sale, they failed to attend the sale or file an
adverse claim, or to thereafter redeem the subject properties. [46]
Unperturbed, petitioners filed the instant petition.

The Issues Before The Court

The essential issues in this case are whether or not the CA erred in:  (a) ruling that
petitioners were aware that they were mere accommodation mortgagors, and (b)
dismissing the complaint on the grounds of prescription and laches.

The Court's Ruling

The petition lacks merit.

A.  Vitiation of Consent.

Time and again, the Court has stressed that allegations must be proven by sufficient
evidence because mere allegation is not evidence.[47] Thus, one who alleges any
defect or the lack of a valid consent to a contract must establish the same by
full, clear, and convincing evidence, not merely by preponderance of
evidence.[48] The rule is that he who alleges mistake affecting a transaction must
substantiate his allegation, since it is presumed that a person takes ordinary care of his
concerns and that private transactions have been fair and regular. [49] Where mistake
or error is alleged by parties who claim to have not had the benefit of a good
education, as in this case, they must establish that their personal
circumstances prevented them from giving their free, voluntary, and
spontaneous consent to a contract.[50]

After a judicious perusal of the records, the Court finds petitioners' claim of mistake or
error (that they acted merely as accommodation mortgagors) grounded on their "very
limited education" and "lack of proper instruction" not to be firmly supported by the
evidence on record.

As correctly observed by the CA, the testimony of petitioner Francisco Sierra as to

petitioners' respective educational backgrounds[51] remained uncorroborated. The other
petitioners-signatories to the deed never testified that their educational background
prevented them from knowingly executing the subject deed as mere accommodation
mortgagors. Petitioners' claim of lack of "proper instruction on the intricacies in
securing [the] loan from the bank" is further belied by the fact that petitioners Francisco
and Rosario Sierra had previously mortgaged two (2) of the subject properties twice to
the Rural Bank of Antipolo. Moreover, petitioners did not: (a) demand for any loan
document containing the details of the transaction, i.e., monthly amortization, interest
rate, added charges, etc., and the release of the remaining amount of their alleged loan;
and (b) offer to pay the purported partial loan proceeds they received at any time,
[52]
 complaining thereof only in 1991 when they filed their complaint. Indeed, the
foregoing circumstances clearly show that petitioners are aware that they were mere
accommodation mortgagors, debunking their claim that mistake vitiated their consent
to the mortgage.
Thus, there being valid consent on the part of petitioners to act as accommodation
mortgagors, no reversible error was committed by the CA in setting aside the RTC's
Decision declaring the real estate mortgage as void for vices of consent and awarding
damages to petitioners. As mere accommodation mortgagors, petitioners are not
entitled to the proceeds of the loan, nor were required to be furnished with the loan
documents[53] or notice of the borrower's default in paying the principal, interests,
penalties, and other charges on due date,[54] or of the extrajudicial foreclosure
proceedings, unless stipulated in the subject deed.[55] As jurisprudence states, an
accommodation mortgagor is a third person who is not a debtor to a principal obligation
but merely secures it by mortgaging his or her own property. [56] Like an accommodation
party to a negotiable instrument, the accommodation mortgagor in effect becomes a
surety to enable the accommodated debtor to obtain credit,[57] as petitioners in this case.

B.  Prescription.

On a second matter, petitioners insist that the CA erred in ruling that their action for
nullification of the subject deed had already prescribed, contending that the applicable
provision is the ten-year prescriptive period of mortgage actions under Article 1142 [58] of
the Civil Code.

The contention is bereft of merit.

Based on case law, a "mortgage action" refers to an action to enforce a right

necessarily arising from a mortgage.[59] In the present case, petitioners are not
"enforcing" their rights under the mortgage but are, in fact, seeking to be relieved
therefrom. The complaint filed by petitioners is, therefore, not a mortgage action as
contemplated under Article 1142.

Considering, however, petitioners' failure to establish that their  consent to the mortgage
was vitiated, rendering them without a cause of action, much less a right of action to
annul the mortgage, the question of whether or not the complaint has prescribed
becomes merely academic.[60]
In any event, even assuming that petitioners have a valid cause of action, the four-year
prescriptive period on voidable contracts[61] shall apply. Since the complaint for
annulment was anchored on a claim of mistake, i.e., that petitioners are the borrowers
under the loan secured by the mortgage, the action should have been brought within
four (4) years from its discovery.

A perusal of the complaint, however, failed to disclose when petitioners learned

that they were not the borrowers under the loan secured by the subject
mortgage. Nonetheless, considering that petitioners admitted receipt on June 19,
1984[62] of PSMB's letter dated June 11, 1984 informing them of the scheduled
foreclosure sale on June 27, 1984 due to GCI's breach of its loan obligation secured by
the subject properties, the discovery of the averred mistake should appear to be
reckoned from June 19, 1984, and not from the dishonor of the checks on January 9,
1984 as ruled by the CA.
C. Laches.

As to this final issue, the Court holds that laches applies.

As the records disclose, despite notice on June 19, 1984 of the scheduled foreclosure
sale, petitioners, for unexplained reasons, failed to impugn the real estate mortgage
and oppose the public auction sale for a period of more than seven (7) years from
said notice.[63] As such, petitioners' action is already barred by laches, which, as case
law holds, operates not really to penalize neglect or sleeping on one's rights, but rather
to avoid recognizing a right when to do so would result in a clearly inequitable situation.
[64]
 As mortgagors desiring to attack a mortgage as invalid, petitioners should act with
reasonable promptness, else its unreasonable delay may amount to ratification.
[65]
 Verily, to allow petitioners to assert their right to the subject properties now after
their unjustified failure to act within a reasonable time would be grossly unfair to PSMB,
and perforce should not be sanctioned.

WHEREFORE, the petition is DENIED. The Decision dated June 27, 2011 of the
Court of Appeals (CA) in CA-G.R. CV No. 91999 is hereby AFFIRMED.

SO ORDERED.

SPS. ROBERTO AND ADELAIDA PEN v. SPS. SANTOS AND LINDA JULIAN, GR No.
160408, 2016-01-11
Facts:
On April 9, 1986, the appellees (the Julians) obtained a P60,000.00 loan from appellant
Adelaida Pen. On May 23, 1986 and on the (sic) May 27, 1986, they were again
extended loans in the amounts of P50,000.00 and PI0,000.00, respectively by appellant
Adelaida. The... initial interests were deducted by appellant Adelaida, (1) P3,600.00 from
the P60,000.00 loan; (2) P2,400.00 from the P50,000.00 loan; and (3) P600.00 from the
PI0,000.00 loan. Two (2) promissory notes were executed by the appellees in favor of
appellant Adelaida to evidence the... foregoing loans, one dated April 9, 1986 and
payable on June 15, 1986 for the P60,000.00 loan and another dated May 22, 1986
payable on July 22, 1986 for the P50,000.00 loan. Both loans were charged interest at
6% per month. As security, on May 23, 1986, the appellees executed a
Real Estate Mortgage over their property covered by TCT No. 327733 registered under
the name of appellee Santos Julian, Jr. The owner's duplicate of TCT No. 327733 was
delivered to the appellants.
Appellant's version of the subsequent events run as follows: When the loans became
due and demandable, appellees failed to pay despite several demands. As such, appellant
Adelaida decided to institute foreclosure proceedings. However, she was prevailed upon
by appellee Linda not... to foreclose the property because of the cost of litigation and
since it would cause her embarrassment as the proceedings will be announced in public
places at the City Hall, where she has many friends. Instead, appellee Linda offered their
mortgaged property as payment in kind.
After the ocular inspection, the parties agreed to have the property valued at
P70,000.00. Thereafter, on October 22, 1986 appellee executed a two (2) page Deed of
Sale duly signed by her on the left margin and over her printed name. After the
execution of the Deed of Sale,... appellant Pen paid the capital gains tax and the required
real property tax. Title to the property was transferred to the appellants by the issuance
of TCT No. 364880 on July 17, 1987. A reconstituted title was also issued to the
appellants on July 09, 1994 when the Quezon City
Register of Deeds was burned (sic).
On July 1989, appellants allege that appellee Linda offered to repurchase the property to
which the former agreed at the repurchase price of P436,115.00 payable in cash on July
31, 1989. The appellees failed to repurchase on the agreed date. On February 1990,
appellees again... offered to repurchase the property for the same amount, but they still
failed to repurchase. On June 28, 1990, another offer was made to repurchase the
property for the same amount. Appellee Linda offered to pay P100,000.00 in cash as
sign of good faith. The offer was rejected... by appellant Adelaida. The latter held the
money only for safekeeping upon the pleading of appellee Linda. Upon the agreement of
the parties, the amount of P100,000.00 was deducted from the balance of the appellees'
indebtedness, so that as of October 15, 1997, their unpaid... balance amounted to
P319,065.00. Appellants allege that instead of paying [the] said balance, the appellees
instituted on September 8, 1994 the civil complaint and filed an adverse claim and lis
pendens which were annotated at the back of the title to the property.
On the other hand, the appellees aver the following: At the time the mortgage was
executed, they were likewise required by the appellant Adelaida to sign a one (1) page
document purportedly an "Absolute Deed of Sale". Said document did not contain any
consideration, and was
"undated, unfilled and unnotarized". They allege that their total payments amounted to
P115,400.00 and that their last payment was on June 28, 1990 in the amount of
P100,000.00.
In December 1992, appellee Linda Julian offered to pay appellant Adelaida the amount
of PI50,000.00. The latter refused to accept the offer and demanded that she be paid
the amount of P250,000.00. Unable to meet the demand, appellee Linda desisted from
the offer and requested... that she be shown the land title which she conveyed to the
appellee Adelaida, but the latter refused. Upon verification with the Registry of Deeds of
Quezon City, she was informed that the title to the mortgaged property had already
been registered in the name of appellee
Adelaida under TCT No. 364880, and that the transfer was entered on July 17, 1987. A
reconstituted title, TCT No. RT-45272 (364880), also appeared on file in the Registry of
Deeds replacing TCT No. 364880.
By reason of the foregoing discoveries, appellee filed an Affidavit of Adverse Claim on
January 1993. Counsel for the appellees, on August 12, 1994, formally demanded the
reconveyance of the title and/or the property to them, but the appellants refused. In the
process of... obtaining other documents; the appellees also discovered that the
appellants have obtained several Declarations of Real Property, and a Deed of Sale
consisting of two (2) pages which was notarized by one Atty. Cesar Ching. Said
document indicates a consideration of P70,000.00... for the lot, and was made to appear
as having been executed on October 22, 1986. On September 8, 1994, appellees filed a
suit for the Cancellation of Sale, Cancellation of Title issued to the appellants; Recovery
of Possession; Damages with Prayer for Preliminary Injunction. The... complaint alleged
that appellant Adelaida, through obvious bad faith, maliciously typed, unilaterally filled
up, and caused to be notarized the Deed of Sale earlier signed by appellee Julian, and
used this spurious deed of sale as the vehicle for her fraudulent transfer unto... herself
the parcel of land covered by TCT No. 327733.[3]
Judgment of the RTC
In its judgment rendered on August 30, 1999,[4] the RTC ruled in favor of the
respondents. According greater credence to the version of the respondents on the true
nature of their transaction, the trial court concluded that they had not agreed on the...
consideration for the sale at the time they signed the deed of sale; that in the absence of
the consideration, the sale lacked one of the essential requisites of a valid contract; that
the defense of prescription was rejected because the action to impugn the void contract
was... imprescriptible; and that the promissory notes and the real estate mortgage in
favor of the petitioners were nonetheless valid, rendering the respondents liable to still
pay their outstanding obligation with interest.
On appeal by the petitioners, the CA affirmed the RTC with modification under its
assailed decision of October 20, 2003
The CA pronounced the deed of sale as void but not because of the supposed lack of
consideration as the RTC had indicated, but because of the deed of sale having been
executed at the same time as the real estate mortgage, which rendered the sale as a
prohibited pactum... commissorium in light of the fact that the deed of sale was blank as
to the consideration and the date, which details would be filled out upon the default by
the respondents; that the promissory notes contained no stipulation on the payment of
interest on the obligation, for... which reason no monetary interest could be imposed for
the use of money; and that compensatory interest should instead be imposed as a form
of damages arising from Linda's failure to pay the outstanding obligation.
Issues:
(1) whether or not the CA erred in ruling against the validity of the deed of sale; and (2)
whether or not the CA erred in ruling that no monetary interest was due for Linda's use
of Adelaida's money.
Ruling:
Article 2088 of the Civil Code prohibits the creditor from appropriating the things given
by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary
is null and void.
The elements for pactum commissorium to exist are as follows,... to wit: (a) that there
should be a pledge or mortgage wherein property is pledged or mortgaged by way of
security for the payment of the principal obligation; and (b) that there should be a
stipulation for an automatic appropriation by the creditor of the thing... pledged or
mortgaged in the event of non-payment of the principal obligation within the stipulated
period.[9] The first element was present considering that the property of the
respondents was mortgaged by Linda in favor of Adelaida as security for the... former's
indebtedness. As to the second, the authorization for Adelaida to appropriate the
property subject of the mortgage upon Linda's default was implied from Linda's having
signed the blank deed of sale simultaneously with her signing of the real estate
mortgage. The haste... with which the transfer of property was made upon the default by
Linda on her obligation, and the eventual transfer of the property in a manner not in the
form of a valid dacion en pago ultimately confirmed the nature of the transaction as a
pactum... commissorium.
The petitioners have theorized that their transaction with the respondents was a valid
dacion en pago by highlighting that it was Linda who had offered to sell her property
upon her default. Their theory cannot stand scrutiny. Dacion en pago is in the nature of
a... sale because property is alienated in favor of the creditor in satisfaction of a debt in
money.
To have a valid dacion en pago, therefore, the alienation of... the property must fully
extinguish the debt. Yet, the debt of the respondents subsisted despite the transfer of
the property in favor of Adelaida.
The petitioners insist that the parties agreed that the deed of sale would not yet contain
the date and the consideration because they had still to agree on the price.[13] Their
insistence is not supported by the established circumstances. It appears that... two days
after the loan fell due on October 15, 1986,[14] Linda offered to sell the mortgaged
property;[15] hence, the parties made the ocular inspection of the premises on October
18, 1986. By that time, Adelaida had already become... aware that the appraiser had
valued the property at P70,000.00. If that was so, there was no plausible reason for still
leaving the consideration on the deed of sale blank if the deed was drafted by Adelaida
on October 20, 1986, especially considering that they could have... conveniently
communicated with each other in the meanwhile on this significant aspect of their
transaction. It was also improbable for Adelaida to still hand the unfilled deed of sale to
Linda as her copy if, after all, the deed of sale would be eventually notarized on October
22, 1986.
According to Article 1318 of the Civil Code, the requisites for any contract to be valid
are, namely: (a) the consent of the contracting parties; (b) the object; and (c) the
consideration. There is a perfection of a contract when there is a meeting of... the minds
of the parties on each of these requisites.
In a sale, the contract is perfected at the moment when the seller obligates herself to
deliver and to transfer ownership of a thing or right to the buyer for a price certain, as to
which the latter agrees.[19] The absence of the consideration from Linda's... copy of the
deed of sale was credible proof of the lack of an essential requisite for the sale. In other
words, the meeting of the minds of the parties so vital in the perfection of the contract
of sale did not transpire. And, even assuming that Linda's leaving the consideration...
blank implied the authority of Adelaida to fill in that essential detail in the deed of sale
upon Linda's default on the loan, the conclusion of the CA that the deed of sale was a
pactum commisorium still holds, for, as earlier mentioned, all the elements of pactum...
commisorium were present.
Anent interest
The CA correctly deleted the monetary interest from the judgment. Pursuant to Article
1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in
writing. In order for monetary interest to be imposed, therefore, two requirements must
be... present, specifically: (a) that there has been an express stipulation for the payment
of interest; and (b) that the agreement for the payment of interest has been reduced in
writing.
The CA properly imposed compensatory interest to offset the delay in the respondents'
performance of their obligation. Nonetheless, the imposition of the legal rate of interest
should be modified to conform to the prevailing jurisprudence. The rate of 12% per
annum... imposed by the CA was the rate set in accordance with Eastern Shipping Lines,
Inc., v. Court of Appeals.[22] In the meanwhile, Bangko Sentral ng Pilipinas Monetary
Board Resolution No. 796 dated May 16, 2013, amending Section 2 of Circular No.
905,... Series of 1982, and Circular No. 799, Series of 2013, has lowered to 6% per
annum the legal rate of interest for a loan or forbearance of money, goods or credit
starting July 1, 2013. This revision is expressly recognized in Nacar v. Gallery Frames.
[23] It should be noted, however, that imposition of the legal rate of interest at 6% per
annum is prospective in application.
Accordingly, the legal rate of interest on the outstanding obligation of P43,492.15 as of
June 28, 1990, as the CA found, should be as follows: (a) from the time of demand on
October 13, 1994 until June 30, 2013, the legal rate of interest was 12% per annum
conformably... with Eastern Shipping Lines; and (b) following Nacar, from July 1, 2013
until full payment, the legal interest is 6% per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on October 20, 2003
subject to the MODIFICATION that the amount of P43,492.15 due from the
respondents shall earn legal interest of 12% per annum reckoned from October 13, 1994
until June 30, 2013,... and 6% per annum from July 1, 2013 until full payment.
Without pronouncement on costs of suit.
SO ORDERED.

SPS. LEHNER AND LUDY MARTIRES v. MENELIA CHUA, GR No. 174240, 2013-03-20
Facts:
twenty-four memorial lots located at the Holy Cross Memorial Park
Respondent, together with her mother, Florencia R. Calagos, own... respondent
borrowed from petitioner spouses
The loan was secured by a real estate mortgage over the abovementioned property
Respondent failed to fully settle her obligation.
Subsequently, without foreclosure of the mortgage, ownership of the subject lots were
transferred in the name of petitioners... respondent filed... against petitioners... praying
for the annulment of the... contract of mortgage between her and petitioners on the
ground that the interest rates imposed are unjust and exorbitant.
She likewise prayed that the Register of Deeds of Quezon City and Manila Memorial
Park, Inc. be directed to reconvey the disputed property to her.
After trial, the RTC of Quezon City rendered a Decision in favor of petitioners
On appeal, the CA affirmed
The CA ruled that respondent voluntarily entered into a contract of loan and that the
execution of the Deed of Transfer is sufficient evidence of petitioners' acquisition of
ownership of the subject property.
The CA reconsidered its findings and concluded that the Deed of Transfer which, on its
face, transfers ownership of the subject property to petitioners, is, in fact, an equitable
mortgage.
The CA held that the true intention of respondent was merely to provide security for
her... loan and not to transfer ownership of the property to petitioners.
Issues:
THE COURT OF APPEALS PATENTLY ERRED IN NOT UPHOLDING THE DEED OF
TRANSFER EXECUTED BY THE RESPONDENT IN FAVOR OF THE PETITIONERS
BY RULING THAT
The Deed of Transfer executed by respondent in favor of petitioners over the subject
property was not entered in the Notarial Book
Ruling:
The petition lacks merit.
the presumptions that attach to notarized documents can be affirmed only so long as it is
beyond dispute that the notarization was regular.
A defective... notarization will strip the document of its public character and reduce it to
a private instrument... when there is a defect in the notarization of a document, the clear
and convincing evidentiary standard normally attached to a... duly-notarized document is
dispensed with... the CA has clearly pointed out the dubious circumstances and
irregularities attendant in the alleged notarization of the subject Deed of Transfer
While indeed a notarized document enjoys the presumption of regularity, the fact that a
deed is notarized is not a guarantee of the validity of its contents.
The presumption is not absolute and may be rebutted by clear and convincing evidence
to the... contrary.
An equitable mortgage has been defined as one which... reveals the intention of the
parties to charge real property as security for a debt
Since the original transaction between the parties was a mortgage, the subsequent
assignment of ownership of the subject lots to petitioners without the benefit of
foreclosure proceedings, partakes of the nature of a pactum  commissorium
Pactum commissorium is a stipulation empowering the creditor to appropriate the thing
given as guaranty for the fulfillment of the obligation in the event the obligor fails to live
up to his undertakings, without further formality... the instant petition is DENIED
Leticia Elizondo Eupena, Petitioner,

vs.

Luis G. Bobier, Respondent.

DECISION
CARANDANG, J.:
This is a Petition for Review on Certiorari [1]  under Rule 45 of the Rules of Court (Rules)
assailing the Decision [2]  dated October 11, 2013 and the Resolution [3]  January 24, 2014
of the Court of Appeals (CA) in CA-G.R. SP No. 129493. The Decision and Resolution
of the CA reversed the Regional Trial Court’s (RTC) Decision [4]  dated March 4, 2013
and dismissed the complaint for unlawful detainer filed by petitioner Leticia Elizondo
Eupena (Eupena) against respondent Luis G. Bobier (Bobier). [5]
Facts of the Case

On February 11, 2011, Eupena filed a Complaint [6]  for unlawful detainer against Bobier.
Eupena claimed to be the owner of a parcel of land designated as Block 3, Lot 3, Phase 6
of Golden City Subdivision in Taytay, Rizal and evidenced by Transfer Certificate of
Title (TCT) No. 698957. [7]  She alleged to have leased the subject property to Bobier and
presented a Contract of Lease [8]  dated November 22, 2005 (lease contract). The monthly
rent was fixed at P3,000.00 from October 1, 2005 to September 30, 2006. Although the
written contract was not renewed, the lease was extended on a monthly basis.

Bobier started to default on his rent payments in May 2010. Eupena sent a demand
letter [9]  dated January 28, 2011 seeking payment of P27,000.00 as rent in arrears.
Because of Bobier’s refusal to heed Eupena’s demand, Eupena asked that the court order
Bobier to vacate the subject land and pay”(1) P27,000.00 as rent in arrears; (2)
P50,000.00 as attorney’s fees; and (3) the cost of suit. [10]

Bobier denied Eupena’s ownership over the subject land. In his Verified Answer,
[11]
 Bobier averred that he was the owner of the land and merely sought Eupena’s
financial assistance when he could not complete his amortization payments over the
land’s purchase.

According to Bobier, he purchased the land from Extraordinary Development

Corporation (EDC) in 1995 under a lease-to-own arrangement for P438,200.00. At that
time, he was an overseas contract worker deployed in Saudi Arabia. Under the
arrangement, Bobier was to make monthly payments of P6,543.99. [12]  He had been
diligent in paying until 2001, when he started experiencing some financial difficulty. In
a Notice of Cancellation [13]  dated July 1, 2002 (Notice) and following Republic Act No.
6552, [14]  EDC gave Bobier 15 days from receipt of the Notice to settle his unpaid
amortizations covering January 7, 2002 to June 7, 2002. Fearing the loss of his house
and lot, Bobier and his wife approached Eupena. At that time, Eupena was the co-worker
and kumadre of Bobier’s wife.

On September 6, 2004, Bobier executed a Special Power of Attorney (SPA), [15]  which
states:
I, LUIS G. BOBIER, xxx do hereby name, constitute, and appoint LETICIA E.
EUPENA, xxx to be my true and lawful attorney, and in my name, place, and stead, to
do and perform the following acts:

TO CLAIM, COLLECT AND RECEIVE FROM EXTRAORDINARY DEVELOPMENT

CORPORATION XXX THE TITLE ISSUED IN MY NAME AS REGISTERED OWNER
OF REAL PROPERTY KNOWN AS PHASE 6 BLOCK 3 LOT 3 OF THE GOLDEN
CITY SUBDIVISION, TAYTAY, RIZAL, UPON FULL PAYMENT OF MY
OUTSTANDING OBLIGATION WITH THE SAID DEVELOPER, TO SERVE AS
COLLATERAL FOR THE LOAN THAT I CONTRACTED WITH SAID LETICIA
EUPENA FOR THE PAYMENT OF MY SAID OUTSTANDING OBLIGATION.

x x x x [16]

Bobier only discovered that Eupena was able to transfer the title of the property to the
latter’s name when he received a copy of the complaint. Bobier thus alleged that Eupena
automatically appropriated the subject lot and should not be entitled to the prayer in
Eupena’s Complaint.

Ruling of the Municipal Trial Court

In a Decision [17]  dated May 4, 2012, the Municipal Trial Court (MTC) granted Eupena’s
Complaint and ordered Bobier to vacate the premises, peacefully surrender possession to
Eupena peacefully, and pay Eupena: (1) P27,000.00 as rental arrears and (2) P20,000.00
as attorney’s fees, and the cost of suit. [18]

The MTC explained that since the lease contract clearly shows the agreement for Bobier
to lease Eupena’s property, then Bobier was estopped from assailing the Eupena’s
ownership over the land. [19]

Bobier appealed with the RTC, claiming that the SPA only gave Eupena the authority “to
retrieve the title issued in [respondent’s] name and no other.” [20]  He accused Eupena of
keeping the loan agreement from him because it contained “a provision regarding the
automatic execution of a deed of absolute sale if and when [Bobier] fails to pay the
loan[.]” [21]
Ruling of the Regional Trial Court

In its March 4, 2013 Decision, [22]  the RTC affirmed the MTC’s decision in toto. The
RTC ruled that there was no pactum commissorium [23]  because the automatic
appropriation clause prohibited by Article 2088 [24]  of the Civil Code was not present in
the SPA.

The RTC did not give credit to Bobier’s allegation that he signed the lease contract
“with the understanding that the rentals will serve as his payments to [Eupena].” [25]  The
lease contract was clear. It did not allow rental payments to be applied to Bobier’s loan
with petitioner. [26]

Unfazed, Bobier elevated the matter to the CA via a Petition for Review under Rule 42
of the Rules. Similar to the issues raised before the RTC, Bobier claimed that the RTC
erroneously disregarded the SPA and improperly ruled that there was no  pactum
commissorium in the instant case. [27]
Ruling of the Court of Appeals

The CA granted the petition and dismissed the Complaint against Bobier. The appellate
court found the elements of pactum commissorium present because the title of the subject
lot was transferred under Eupena’s name just over a year after the SPA was executed.
“The existence of the loan and the transfer of the property from x x x Bobier to x x x
Eupena lead to no other conclusion but that the latter appropriated the property when the
former failed to pay his indebtedness.” [28]  The CA noted that Eupena failed to address the
claim of a pactum commissorium and did not state how the property was transferred to
her name. [29]

Thus, the CA provisionally declared petitioner’s title void. [30]  Without a valid title, the
CA then dismissed petitioner’s Complaint for unlawful detainer against respondent.

Eupena filed the instant petition for review on certiorari. She maintained that the CA
should have declared her as the owner of the property for purposes of determining
possession de facto because of the TCT in her name. Bobier’s defense of a pactum
commissorium is a collateral attack on Eupena’s title that should not be entertained.
[31]
 Moreover, Bobier is estopped from assailing the Eupena’s ownership by virtue of
their lease contract. Under Section 2(b), [32]  Rule 131 of the Rules, a tenant cannot deny
his/her land owner’s title.
Ruling of the Court

An action for unlawful detainer is filed only for the purpose of recovering physical
possession or possession de facto. Such action is summary in nature to provide for a
peaceful, speedy, and expeditious means of preventing an alleged illegal possessor from
unjustly continuing possession during the long period it would take to properly resolve
the issue of ownership or one’s right to possession (a.k.a. possession  de jure). [33]

When the defendant raises the defense of ownership and the question of possession
cannot be resolved without passing upon the issue of ownership, a determination of
ownership should be made but only to determine the issue of possession. [34]  Any
pronouncement made by the court over the issue of ownership in such cases is merely
provisional and is made only to determine the principal issue of possession  de facto.
Thus, a defendant’s defense of ownership will not constitute a collateral attack on the
plaintiffs title.

Bobier alleged that he purchased the land from EDC and that Eupena’s right over the
property only stems from the SPA indicating that the property shall be used as a
collateral to Bobier’s loan with Eupena. The loan agreement was never presented during
trial, which Bobier claimed Eupena suppressed from him. Bobier denied executing a
Deed of Sale in Eupena’s favor. He insisted that Eupena secured a TCT under her name
because she automatically appropriated the lot.

Bobier’s allegations do not only show his ownership over the lot but also accuse Eupena
of fraudulently acquiring title over the same. The nature of Bobier’s averments show the
inseparable link between ownership and possession that the trial courts should have
determined.

Instead of categorically denying Bobier’s allegations, Eupena simply based her claim of
ownership (and right to possession) on TCT No. 698957 and the lease contract. Eupena
had every opportunity, from the MTC to the CA to rebut Bobier’s assertions but failed to
do so.

The MTC and RTC hastily concluded that Bobier’s signature in the lease agreement
estopped him from questioning Eupena’s ownership over the property. Citing  Samelo v.
Manotok Services, Inc. [35]  and Tamio v. Ticson, [36]  the RTC held that a lessee is barred
from questioning the lessor’s ownership following Section 2(b), Rule 131 of the Rules.
[37]

In order for Section 2(b), Rule 131 of the Rules to become operative, there must be proof
that a lessor-lessee relationship exists. “A presumption is conclusive x x x upon the
presentation of the evidence.” [38]  In Datalift Movers, Inc. v. Belgravia Realty & Dev’t.
Corp, [39]  We ruled that “[a]s long as the lessor-lessee relationship between the petitioners
[the lessees] exists x x x, the former, as lessees, cannot by any proof, however strong,
overturn the conclusive presumption that Belgravia [as lessor] has valid title to or better
right of possession to the subject leased premises than they have.” [40]

This leads Us to ask: Was Eupena able to prove the existence of a lessor-lessee
relationship?

We rule in the negative.

The peculiar circumstances of the instant petition bring Us to conclude that the mere
existence of a lease agreement is not enough to prove the presence of a lessor-lessee
relationship.

The following facts are undisputed: (1) Bobier initially contracted with EDC to purchase
the subject lot; (2) due to financial difficulties since 2001, Bobier defaulted on his
amortization payments with EDC; (3) Bobier secured a loan with Eupena, the proceeds
of which will be used to pay for Bobier’s unpaid amortizations; (4) Bobier executed an
SPA authorizing Eupena to receive the TCT under Bobier’s name upon Eupena’s full
payment of Bobier’s outstanding obligation with EDC; (5) the SPA categorically stated
that the TCT [again, under Bobier’s name] shall stand as collateral for Bobier’s loan
with Eupena; (6) one year after the execution of the SPA and one month after Eupena
secured TCT No. 698957, the parties executed a lease contract.

The abovementioned facts, along with Bobier’s unrefuted allegations that Eupena
concealed: (1) the loan agreement; and (2) the deed of sale he allegedly executed in
Eupena’s favor, [41]  show that Eupena possibly obtained TCT No. 698957 via a pactum
commissorium. In fact, Eupena manifested the presence of a loan agreement, which the
RTC (in a separate action for reconveyance) declared void for being a.  pactum
commissorium. [42]  While the action for reconveyance is still the subject of a Notice of
Appeal, such pronouncement corroborates Bobier’s claims.

Given the factual backdrop, the validity of the lease agreement becomes suspect. Even
without presenting the loan agreement containing the void stipulation, the parties’
actions before the institution of the ejectment case reveals Eupena’s intention to
automatically acquire the property.

Following Our ruling in Bustamante v. Sps. Rosel, [43]  this is also embraced under the
concept of a pactum commissorium. Because Eupena illegally obtained TCT No. 698957,
the lease agreement becomes void following Article 1409(1) [44]  of the Civil Code. Under
Article 1409(1), contracts whose purpose is contrary to law are void and inexistent from
the beginning. Here, the lease agreement is the result of a pactum commissorium,
resulting in its invalidity for violating Article 2088 [45]  of the Civil Code.

We are more inclined to believe that because of Bobier’s need to pay EDC and his fear
of losing the house and lot (which he has been paying for the past 6 years out of the 10-
year lease-to-own contract with EDC), [46]  Bobier was compelled to accede to Eupena’s
demand of signing the lease contract. [47]  According to Bobier, he signed the lease
contract with the understanding that the “rent payments” are, in reality, his loan
payments to Eupena. The fact that the lease agreement (executed one month after the
issuance of TCT No. 698957) indicated Bobier’s residence as Phase 6, B3, Lot 3 of
Golden City Subdivision, Taytay, Rizal – the very lot subject of the lease agreement –
lends credence to his version of the events as against Eupena’s complete lack of
evidence to prove otherwise.

This Court has recognized the reality that “[a] 11 persons in need of money are liable to
enter into contractual relationships whatever the condition if only to alleviate their
financial burden albeit temporarily. Hence, courts are duty bound to exercise caution in
the interpretation and resolution of contracts lest the lenders devour the borrowers like
vultures do with their prey.” [48]  While the lease agreement is clear in its terms, the
factual milieu of this case militates against upholding its validity.
With the possibility of a pactum commissorium, Eupena’s ownership over the subject
land becomes invalid. The lease agreement, upon which the unlawful detainer complaint
is based, is void. Eupena, thus, failed to prove the first element of an unlawful detainer –
i.e., that possession by Bobier was by a valid lease contract. [49]

WHEREFORE, the petition is DENIED. The Decision dated October 11, 2013 and the
Resolution dated January 24, 2014 of the Court of Appeals in CA-G.R. SP No. 129493
are hereby AFFIRMED.

SO ORDERED.

Dacquel v. Spouses Sotelo

WHAT HAPPENED IN THIS CASE?

A PROPERTY WAS MADE COLLATERAL TO SECURE A LOAN OF P140,000.00. THE MARKET VALUE OF
THE PROPERTY WAS P1,750,000.00. THE DOCUMENT EXECUTED WAS A DEED OF SALE. THE
CREDITOR THEN CAUSED THE ISSUANCE OF NEW TITLE IN HIS NAME.  THE SUPREME COURT
DECLARED THE TRANSACTION AS EQUITABLE MORTGAGE. THE NEW TITLE IS VOID.
As the transaction between the parties herein was demonstrated to be one of equitable mortgage,
petitioner did not become owner of the subject property but a mere mortgagee thereof. As such,
petitioner was bound by the prohibition against pactum commissorium as embodied in Article 2088
of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
The mortgagee’s consolidation of ownership over the mortgaged property upon the mortgagor’s
mere failure to pay the obligation is the essence of pactum commissorium. 36 The mortgagor’s
default does not operate to automatically vest on the mortgagee the ownership  of the encumbered
property. This Court has repeatedly declared such arrangements as contrary to morals and public
policy and thus void.

Spouses Yu vs PCIB
TITLE: Spouses Yu vs. PCIB
CITATION: GR No. 147902, March 17, 2006
FACTS:
Petitioners Vicente Yu and Demetria Lee-Yu mortgaged their title, interest, and participation over
several parcels of land located in Dagupan City and Quezon City, in favor of the Philippine
Commercial International Bank, respondent and highest bidder, as security for the payment of a loan.
As petitioners failed to pay the loan and the interest and penalties due thereon, respondent filed
petition for extra-judicial foreclosure of real estate mortgage on the Dagupan City properties on July
21, 1998.  City Sheriff issued notice of extra-judicial sale on August 3, 1998 scheduling the auction
sale on September 10, 1998.
Certificate of Sale was issued on September 14, 1998 in favor of respondent, the highest bidder.  The
sale was registered with the Registry of Deeds in Dagupan City on October 1, 1998.  After two
months before the expiration of the redemption period, respondent filed an ex-parte petition for writ
of possession before RTC of Dagupan.  Petitioners complaint on annulment of certificate of sale and
motion to dismiss and to strike out testimony of Rodante Manuel was denied by said RTC.  Motion
for reconsideration was then filed on February 14, 2000 arguing that the complaint on annulment of
certificate of sale is a prejudicial issue to the filed ex-parte petition for writ of possession, the
resolution of which is determinative of propriety of the issuance of a Writ of Possession.
ISSUE: Whether prejudicial question exist in a civil case for annulment of a certificate of sale and a
petition for the issuance of a writ of possession.
HELD:
Supreme Court held that no prejudicial question can arise from the existence of a civil case for
annulment of a certificate of sale and a petition for the issuance of a writ of possession in a special
proceeding since the two cases are both civil in nature which can proceed separately and take their
own direction independently of each other. 

A prejudicial question is “one that arises in a case the resolution of which is a logical antecedent of
the issue involved therein, and the cognizance of which pertains to another tribunal.  It generally
comes into play in a situation where a civil action and a criminal action are both pending and there
exists in the former an issue that must be preemptively resolved before the criminal action may
proceed because issue raised in civil action would be determinative de jure of the guilt or innocence
of the accused in a criminal case”.  

Litonjua v. L & R Corporation

GR No. 130722
December 9, 1999

Facts
The spouses Litonjua obtained a loan from L&R Corporation, which was secured by a
mortgage of two parcels of land owned by the couple. In 1979, the spouses sold the
parcels of land to Philippine White House Auto Supply Inc. (PWHAS), and the sale
was annotated at the back of the certificates of title. When the spouses defaulted in the
payment of their loans to L&R, the company initiated an extrajudicial foreclosure.
The properties were successfully foreclosed and sold at a public auction, wherein
L&R was the only bidder.
L&R was about to register the sale, but it learned for the first time of the Litonjuas’
sale of the lands to PWHAS.
The Deed of Real Estate Mortgage between the spouses and L&R contained the
following provisions:
Section 8: That the mortgagors shall not sell, dispose of, mortgage, nor in any other
manner encumber the real property/properties subject of this mortgage without the
prior written consent of the mortgagee;
Section 9: That should the mortgagors decide to sell the real property/properties
subject of this mortgage, the mortgagee shall be duly notified thereof by the
mortgagors and should the mortgagee be interested to purchase the same, the latter
shall be given priority over all the other prospective buyers

Issues
1. Are paragraphs 8 and 9 of the Real Estate Mortgage valid and enforceable?
2. Is the sale of the properties to PWHAS without the consent of L&R valid?

Ruling

1. Paragraph 8 is invalid but paragraph 9 is valid.

Par. 8 violates Article 2130 of the Civil Code which provides that stipulation
forbidding the owner from alienating the immovable shall be void. While it is true that
the provisions does not absolutely prohibit the mortgagor from selling his property,
what it does not outrightly prohibit, it nevertheless achieves. For all intents and
purposes, the stipulation practically gives the mortgagee the sole prerogative to
prevent any sale of the mortgaged property to a third party. Being contrary to law, the
provision is void and is not binding on the parties.

Par. 9, on the other hand, is perfectly valid. The right to first refusal has long been
recognized as valid in Philippine jurisdiction.
2. The sale is valid but RESCISSIBLE. The Court cited the case of Guzman, Bocaling
& Co v. Bonnevie, where it held that a contract of sale which violated the right of first
refusal was rescissible.
It is clear from the facts that the spouses did not inform L&R of their intent to sell the
properties. By doing so, they disrespected the latter’s right to first refusal.
Furthermore, although the right was not exercised by the company at the opportune
time, this cannot be taken against it because they were never informed of the sale in
the first place.

PARADIGM DEVELOPMENT CORPORATION OF PHILIPPINES v. BANK OF PHILIPPINES

ISLANDS, GR No. 191174, 2017-06-07
Facts:
Sometime in February 1996, Sengkon Trading (Sengkon), a sole proprietorship owned by
Anita Go, obtained a loan from Far East Bank and Trust Company (FEBTC) under a credit
facility denominated as Omnibus Line in the amount of P100 Million
FEBTC again granted Sengkon another credit facility, denominated as Credit Line, in the
amount of P60 Million as contained in the "Agreement for Credit Line." Two real estate
mortgage (REM) contracts were executed by PDCP President Anthony L. Go (Go) to partially
secure Sengkon's obligations under this Credit Line.
One REM... was constituted over Transfer Certificate of Title (TCT... and secured the amount
of P8 Million.
The other REM... was constituted over TCT... nd secured the amount of P42,400,000.00.
FEBTC informed Sengkon regarding the renewal, increase and conversion of its P100 Million
Omnibus Line to P150 Million LC-TR Line and P20 Million Discounting Line, the renewal of
the P60 Million Credit Line and P8 Million Bills Purchased Line.
In the same letter, FEBTC also approved the request of Sengkon to change the account
name from SENGKON TRADING to SENGKON TRADING, INC. (STI)
Eventually, Sengkon defaulted in the payment of its loan obligations.
FEBTC demanded payment from PDCP of alleged Credit Line and Trust Receipt availments
with a principal balance of P244,277,199.68 plus interest and other charges which Sengkon
failed to pay.
Negotiations were then held and PDCP proposed to pay approximately P50 Million... but
FEBTC pressed for a comprehensive repayment scheme for the entirety of Sengkon's
obligations.
Meanwhile, the negotiations were put on hold because BPI acquired FEBTC and assumed
the rights and obligations of the latter.
When negotiations for the payment of Sengkon's outstanding obligations, however, fell,
FEBTC, on April 5, 2000, initiated foreclosure proceedings against the mortgaged properties
of PDCP before the Regional Trial Court (RTC) of Quezon City.
P76,500,000.00... in PARTIAL SETTLEMENT of the obligation of [PDCP]
PDCP discovered that FEBTC extra-judicially foreclosed... without notice to it as mortgagor
and sold the mortgaged properties to FEBTC as the lone bidder.
the corresponding Certificate of Sale was registered.
PDCP filed a Complaint for Annulment of Mortgage, Foreclosure, Certificate of Sale and
Damages... against BPI, successor-in-interest of FEBTC, alleging that the REMs and their
foreclosure were null and void.
PDCP alleged that FEBTC assured it that the mortgaged properties will only secure the
Credit Line sub-facility of the Omnibus Line.
PDCP, however, claimed that it had no intent to be bound under the second REM, which
was not intended to be a separate contract, but only a means to reduce registration
expenses.
PDCP averred that sometime in September 1997, FEBTC allegedly requested it to sign a
document which would effectively extend the liability of the properties covered by the
mortgage beyond the Credit Line. Because of its refusal to sign said document, it surmised
that this must have been the reason why, as it later discovered, FEBTC registered not only
the first but also the second REM, contrary to the parties' agreement.
the RTC rendered its Decision[22] nullifying the REMs and the foreclosure proceedings.
the CA reversed the RTC's ruling on all points.
the fact that PDCP surrendered the titles to the mortgaged properties to FEBTC only shows
that PDCP intended to mortgage all of these properties;... each of the two REMs should
have covered the four properties but it was not.
On the contrary, the four properties were spread out with one REM covering one of the four
properties and the other REMs covering the remaining three properties;
PDCP never complained to FEBTC regarding the registration of the two REMs even after it
discovered the same.
Issues:
The registration of the REMs, even if contrary to the supposed intent of the parties, did not
affect the validity of the mortgage contracts
PDCP argued that what its President signed is a pro-forma REM whose important details
were still left in blank at the time of its execution.
No novation took place... the foreclosure of the mortgage was invalid because the PNs that
formed the basis of FEBTC's Petition for Extrajudicial Foreclosure of Mortgage were
inadmissible in evidence.
FEBTC's failure to send personal notice to the mortgagor is fatal to the validity of the
foreclosure proceedings
Ruling:
the registration of the REM contract is not essential to its validity. Article 2085 of the Civil
Code provides: Art. 2085. The following requisites are essential to the contracts of pledge
and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property.
In relation thereto, Article 2125 of the Civil Code reads: Article 2125. In addition to the
requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in the Registry of Property. If
the instrument is not recorded, the mortgage is nevertheless binding between the parties.
Even if the instrument were not recorded, "the mortgage is nevertheless binding between
the parties." The law cannot be any clearer. Effect must be given to it as written. The
mortgage subsists; the parties are bound. As between them, the mere fact that there is as
yet no compliance with the requirement that it be recorded cannot be a bar to foreclosure.
"In Article [2125] an additional provision is made that if the instrument of mortgage is not
recorded, the mortgage, is nevertheless binding between the parties."
Hence, even assuming that the parties indeed agreed to register only one of the two REMs,
the subsequent registration of both REMs did not affect an already validly executed REM if
there was no other basis for the declaration of its nullity.
the PDCP's act of surrendering all the titles to the properties to FEBTC clearly establishes
PDCP's intent to mortgage all of the four properties in favor of FEBTC to secure Sengkon's
obligation under the Credit Line.
Sengkon, has several obligations under its Omnibus Line corresponding to the several credit
sub-facilities made available to it by FEBTC.
PDCP intended to be bound only for Sengkon's availments under the Credit Line sub-facility
and not for just any of Sengkon's availments. Hence, it is in this sense that the phrase "partial
security" should be logically understood.
nowhere in PDCP's Amended Complaint did it anchor its cause of action for the nullity of
the REMs on this ground.
PDCP's Amended Complaint is essentially premised on the supposed fraud employed on it
by FEBTC consisting of the latter's assurances that the REMs it already signed would not be
registered.
Under Article 1344 of the Civil Code, the fraud must be serious to annul or avoid a contract
and render it voidable. This fraud or deception must be so material that had it not been
present, the defrauded party would not have entered into the contract.
In the present case, even if FEBTC represented that it will not register one of the REMs,
PDCP cannot disown the REMs it executed after FEBTC reneged on its alleged promise.
The signature of PDCP's President coupled with its act of surrendering the titles to the four
properties to FEBTC is proof that no fraud existed in the execution of the contract.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor.
However, while the consent of the creditor need not be expressed but may be inferred from
the creditor's clear and unmistakable acts,[41] to change the person of the debtor, the
former debtor must be expressly released from the obligation, and the third person or new
debtor must assume the former's place in the contractual relation.
it is necessary that the old debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation.
PDCP failed to prove by preponderance of evidence that Sengkon was already expressly
released from the obligation and that STI assumed the former's obligation.
the non-execution of the Deed of Assumption by Sengkon, STI and FEBTC rendered the
existence of novation doubtful because of lack of clear proof that Sengkon is being expressly
released from its obligation; that STI was already assuming Sengkon's former place in the
contractual relation; and that FEBTC is giving its conformity to this arrangement.
there was simply no evidence to support the conclusion that the PNs were in fact availments
under the Credit Line secured by PDCP's properties. The PNs that were used by FEBTC in
its Petition for Extrajudicial Foreclosure of Mortgage were all executed beyond the extended
duration of Sengkon's Credit Line
While FEBTC wrote a letter... few days short of the date of the earliest PN... approving the
renewal of the debtor's Credit Line... this letter did not bear the conforme of the debtor
FEBTC's failure to heed PDCP's request for the segregation of the amounts secured by its
properties assumes critical significance.
A dragnet clause is a stipulation in a REM contract that extends the coverage of a mortgage
to advances or loans other than those already obtained or specified in the contract. Where
there are several advances, however, a mortgage containing a dragnet clause will not be
extended to cover future advances, unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor or unless there are clear and
supportive evidence to the contrary.
in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a
"dragnet clause" will not be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage as providing security therefor.
n the present case, PDCP's REMs indeed contain a blanket mortgage clause
Since the liability of PDCP's properties was not unqualified, the PNs, used as basis of the
Petition for Extrajudicial Foreclosure of Mortgage should sufficiently indicate that it is within
the terms of PDCP's limited liability.
FEBTC's foreclosure did not actually cover the specific obligations secured by PDCP's
properties.
while as a rule, personal notice to the mortgagor is not required, such notice may be subject
of a contractual stipulation, the breach of which is sufficient to nullify the foreclosure sale... a
contract is the law between the parties and, that absent any showing that its provisions are
wholly or in part contrary to law, morals, good customs, public order, or public policy, it shall
be enforced to the letter by the courts. Section 3, Act No. 3135 reads:
Nevertheless, the parties to the mortgage contract are not precluded from exacting
additional requirements. In this case, petitioner and respondent in entering into a contract of
[REM],... the parties may stipulate that personal notice of foreclosure proceedings may be
required. Act 3135 remains the controlling law, but the parties may agree, in addition to
posting and publication, to include personal notice to the mortgagor, the non-observance of
which renders the foreclosure proceedings null and void, since the foreclosure proceedings
become an illegal attempt by the mortgagee to appropriate the property for itself.
the general rule is that personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not necessary, and posting and publication will suffice. Sec. 3 of Act 3135
governing extra-judicial foreclosure of [REMs], as amended by Act 4118, requires only
posting of the notice of sale in three public places and the publication of that notice in a
newspaper of general circulation. The exception is when the parties stipulate that personal
notice is additionally required to be given the mortgagor. Failure to abide by the general rule,
or its exception, renders the foreclosure proceedings null and void.