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G.R. No. 118342 January 5, 1998

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,vs.COURT OF APPEALS and LYDIA CUBA, respondents.

G.R. No. 118367 January 5, 1998

LYDIA P. CUBA, petitioner,vs.COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES andAGRIPINA P. CAPERAL, respondents.

DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint 1 filed against theDevelopment Bank of the Philippines (hereafter DBP) and Agripina Caperal filed byLydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBP's appropriation of CUBA's rights, title, and interests over a 44-hectares fishpondlocated in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2)the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) theannulment of DBP's sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the fishpond; and (5) the recovery of damages, attorney'sfees, and expenses of litigation.

After the joinder of issues following the filing by the parties of their respective pleadings,the trial court conducted a pre-trial where CUBA and DBP agreed on the following facts,which were embodied in the pre-trial order: 2

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new)dated May 13, 1974 from the Government;

2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines inthe amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in thePromissory Notes dated September 6, 1974; August 11, 1975; and April 4, 1977;

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights;

4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with theterms of the Promissory Notes;

5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBPappropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;

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6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cubaover the fishpond in question, defendant DBP, in turn, executed a Deed of ConditionalSale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond inquestion;

7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the

Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBPthereafter accepted the offer to repurchase in a letter addressed to plaintiff datedFebruary 1, 1982;

8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a newFishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministryof Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband;

9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she entered with the DBP a temporary arrangement whereby in

consideration for the deferment of the Notarial Rescission of Deed of Conditional Sale,plaintiff Lydia Cuba promised to make certain payments as stated in temporaryArrangement dated February 23, 1982;

11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March13, 1984, and which was received by plaintiff Lydia Cuba;

12. After the Notice of Rescission, defendant DBP took possession of the LeaseholdRights of the fishpond in question;

13. That after defendant DBP took possession of the Leasehold Rights over the fishpondin question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24,1984, to dispose of the property;

14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendantAgripina Caperal on August 16, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-Aon December 28, 1984 by the Ministry of Agriculture and Food.

Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order. 3

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBA's leasehold rights over the fishpond in question without foreclosure proceedingswas contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted onan affirmative resolution. DBP stressed that it merely exercised its contractual rightunder the Assignments of Leasehold Rights, which was not a contract of mortgage.Defendant Caperal sided with DBP.

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The trial court resolved the issue in favor of CUBA by declaring that DBP's takingpossession and ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which provides as follows:

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.

It disagreed with DBP's stand that the Assignments of Leasehold Rights were notcontracts of mortgage because (1) they were given as security for loans, (2) althoughthe "fishpond land" in question is still a public land, CUBA's leasehold rights and interestthereon are alienable rights which can be the proper subject of a mortgage; and (3) theintention of the contracting parties to treat the Assignment of Leasehold Rights as amortgage was obvious and unmistakable; hence, upon CUBA's default, DBP's only rightwas to foreclose the Assignment in accordance with law.

The trial court also declared invalid condition no. 12 of the Assignment of LeaseholdRights for being a clear case of pactum commissorium expressly prohibited and

declared null and void by Article 2088 of the Civil Code. It then concluded that sinceDBP never acquired lawful ownership of CUBA's leasehold rights, all acts of ownershipand possession by the said bank were void. Accordingly, the Deed of Conditional Salein favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Salein favor of defendant Caperal, as well as the Assignment of Leasehold Rights executedby Caperal in favor of DBP, were also void and ineffective.

As to damages, the trial court found "ample evidence on record" that in 1984 therepresentatives of DBP ejected CUBA and her caretakers not only from the fishpondarea but also from the adjoining big house; and that when CUBA's son and caretaker went there on 15 September 1985, they found the said house unoccupied and

destroyed and CUBA's personal belongings, machineries, equipment, tools, and other articles used in fishpond operation which were kept in the house were missing. Themissing items were valued at about P550,000. It further found that when CUBA and her men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpondwith 250,000 pieces of bangus fish (milkfish), all of which died because the DBPrepresentatives prevented CUBA's men from feeding the fish. At the conservative priceof P3.00 per fish, the gross value would have been P690,000, and after deducting 25%of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual damages sustained by CUBA atP1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely representingto the Bureau of Fisheries that it had foreclosed its mortgage on CUBA's leaseholdrights. Such representation induced the said Bureau to terminate CUBA's leaseholdrights and to approve the Deed of Conditional Sale in favor of CUBA. And consideringthat by reason of her unlawful ejectment by DBP, CUBA "suffered moral shock,degradation, social humiliation, and serious anxieties for which she became sick andhad to be hospitalized" the trial court found her entitled to moral and exemplarydamages. The trial court also held that CUBA was entitled to P100,000 attorney's fees

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in view of the considerable expenses she incurred for lawyers' fees and in view of thefinding that she was entitled to exemplary damages.

In its decision of 31 January 1990, 4 the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendantDevelopment Bank of the Philippines in appropriating for its own interest, without any

judicial or extra-judicial foreclosure, plaintiff's leasehold rights and interest over thefishpond land in question under her Fishpond Lease Agreement No. 2083 (new);

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and betweenthe defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) andthe acts of notarial rescission of the Development Bank of the Philippines relative to saidsale (Exhs. 16 and 26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the

Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh.21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendantAgripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12,1985 executed by defendant Agripina Caperal in favor of the defendant DevelopmentBank of the Philippines (Exh. 24) as void ab initio;

4. ORDERING defendant Development Bank of the Philippines and defendant AgripinaCaperal, jointly and severally, to restore to plaintiff the latter's leasehold rights andinterests and right of possession over the fishpond land in question, without prejudice tothe right of defendant Development Bank of the Philippines to foreclose the securitiesgiven by plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the

following amounts:

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVEHUNDRED PESOS (P1,067,500.00), as and for actual damages;

b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS asmoral damages;

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS,

as and for attorney's fees;

6. And ORDERING defendant Development Bank of the Philippines to reimburse and payto defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWOTHOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS(P1,532,610.75) representing the amounts paid by defendant Agripina Caperal todefendant Development Bank of the Philippines under their Deed of Conditional Sale.

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CUBA and DBP interposed separate appeals from the decision to the Court of Appeals.The former sought an increase in the amount of damages, while the latter questionedthe findings of fact and law of the lower court.

In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in

declaring that the deed of assignment was null and void and that defendant Caperalcould not validly acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code becauseDBP appeared to be the sole creditor to CUBA — cession presupposes plurality of debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBAin assigning her property rights in payment of her debts, which amounted to a novationof the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estoppedfrom questioning the assignment of the leasehold rights, since she agreed torepurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits

for lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It, however, deleted the amount of exemplary damages and reduced theaward of moral damages from P100,000 to P50,000 and attorney's fees, from P100,000to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP inappropriating Cuba's leasehold rights and interest under Fishpond Lease AgreementNo. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deedof conditional sale between CUBA and DBP; and (4) the deed of conditional salebetween DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and theassignment of leasehold rights executed by Caperal in favor of DBP. It then ordered

DBP to turn over possession of the property to Caperal as lawful holder of the leaseholdrights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages;P50,000 as moral damages; and P50,000 as attorney's fees.

Since their motions for reconsideration were denied, 6 DBP and CUBA filed separatepetitions for review.

In its petition (G.R. No. 118342), DBP assails the award of actual and moral damagesand attorney's fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court

of Appeals erred (1) in not holding that the questioned deed of assignment was a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that thedeed of assignment effected a novation of the promissory notes; (c) in holding thatCUBA was estopped from questioning the validity of the deed of assignment when sheagreed to repurchase her leasehold rights under a deed of conditional sale; and (d) inreducing the amounts of moral damages and attorney's fees, in deleting the award of exemplary damages, and in not increasing the amount of damages.

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We agree with CUBA that the assignment of leasehold rights was a mortgage contract.

It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000,each of which was covered by a promissory note. In all of these notes, there was aprovision that: "In the event of foreclosure of the mortgage securing this notes, I/We

further bind myself/ourselves, jointly and severally, to pay the deficiency, if any."7

Simultaneous with the execution of the notes was the execution of "Assignments of Leasehold Rights" 8 where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As pointed out by CUBA, thedeeds of assignment constantly referred to the assignor (CUBA) as "borrower"; theassigned rights, as mortgaged properties; and the instrument itself, as mortgagecontract. Moreover, under condition no. 22 of the deed, it was provided that "failure tocomply with the terms and condition of any of the loans shall cause all other loans tobecome due and demandable and all mortgages shall be foreclosed ." And, condition no.33 provided that if "foreclosure is actually accomplished, the usual 10% attorney's fees

and 10% liquidated damages of the total obligation shall be imposed." There is,therefore, no shred of doubt that a mortgage was intended.

Besides, in their stipulation of facts the parties admitted that the assignment was by wayof security for the payment of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights.

In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that anassignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBP's contention that the assignment novated the promissory notesin that the obligation to pay a sum of money the loans (under the promissory notes) wassubstituted by the assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said assignment merelycomplemented or supplemented the notes; both could stand together. The former wasonly an accessory to the latter. Contrary to DBP's submission, the obligation to pay asum of money remained, and the assignment merely served as security for the loanscovered by the promissory notes. Significantly, both the deeds of assignment and thepromissory notes were executed on the same dates the loans were granted. Also, thelast paragraph of the assignment stated: "The assignor further reiterates and states all terms, covenants, and conditions stipulated in the promissory note or notes covering the

proceeds of this loan, making said promissory note or notes, to all intent and purposes,an integral part hereof."

Neither did the assignment amount to payment by cession under Article 1255 of theCivil Code for the plain and simple reason that there was only one creditor, the DBP.Article 1255 contemplates the existence of two or more creditors and involves theassignment of all the debtor's property.

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Nor did the assignment constitute dation in payment under Article 1245 of the civilCode, which reads: "Dation in payment, whereby property is alienated to the creditor insatisfaction of a debt in money, shall be governed by the law on sales." It bearsstressing that the assignment, being in its essence a mortgage, was but a security andnot a satisfaction of indebtedness. 10

We do not, however, buy CUBA's argument that condition no. 12 of the deed of assignment constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the Assignee his Attorney-in-fact with full power and authority to takeactual possession of the property above-described, together with all improvementsthereon, subject to the approval of the Secretary of Agriculture and Natural Resources, tolease the same or any portion thereof and collect rentals, to make repairs or improvements thereon and pay the same, to sell or otherwise dispose of whatever rightsthe Assignor has or might have over said property and/or its improvements and performany other act which the Assignee may deem convenient to protect its interest. Allexpenses advanced by the Assignee in connection with purpose above indicated which

shall bear the same rate of interest aforementioned are also guaranteed by thisAssignment. Any amount received from rents, administration, sale or disposal of saidproperty may be supplied by the Assignee to the payment of repairs, improvements,taxes, assessments and other incidental expenses and obligations and the balance, if any, to the payment of interest and then on the capital of the indebtedness securedhereby. If after disposal or sale of said property and upon application of total amountsreceived there shall remain a deficiency, said Assignor hereby binds himself to pay thesame to the Assignee upon demand, together with all interest thereon until fully paid. Thepower herein granted shall not be revoked as long as the Assignor is indebted to theAssignee and all acts that may be executed by the Assignee by virtue of said power arehereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a property

mortgaged by way of security for the payment of the principal obligation, and (2) thereshould be a stipulation for automatic appropriation by the creditor of the thingmortgaged in case of non-payment of the principal obligation within the stipulatedperiod. 11

Condition no. 12 did not provide that the ownership over the leasehold rights wouldautomatically pass to DBP upon CUBA's failure to pay the loan on time. It merelyprovided for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,and to apply the proceeds to the payment of the loan. This provision is a standardcondition in mortgage contracts and is in conformity with Article 2087 of the Civil Code,

which authorizes the mortgagee to foreclose the mortgage and alienate the mortgagedproperty for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it during the pre-trial, it had "[w]ithout foreclosureproceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it limited itself to

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mere administration by posting caretakers is further belied by the deed of conditionalsale it executed in favor of CUBA. The deed stated:

WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor bythe herein vendees [Cuba spouses] the former acquired all the right and interest of thelatter over the above-described property;

xxx xxx xxx

The title to the real estate property [sic ] and all improvements thereon shall remain in thename of the Vendor until after the purchase price, advances and interest shall have beenfully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and takenownership of CUBA's leasehold rights merely on the strength of the deed of assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide thatCUBA's default would operate to vest in DBP ownership of the said rights. Besides, anassignment to guarantee an obligation, as in the present case, is virtually a mortgageand not an absolute conveyance of title which confers ownership on the assignee. 12

At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article2088 of the Civil Code, which forbids a credit or from appropriating, or disposing of, thething given as security for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP didnot estop her from questioning DBP's act of appropriation. Estoppel is unavailing in thiscase. As held by this Court in some cases, 13 estoppel cannot give validity to an act thatis prohibited by law or against public policy. Hence, the appropriation of the leaseholdrights, being contrary to Article 2088 of the Civil Code and to public policy, cannot bedeemed validated by estoppel.

Instead of taking ownership of the questioned real rights upon default by CUBA, DBPshould have foreclosed the mortgage, as has been stipulated in condition no. 22 of thedeed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in itsletter dated 26 October 1979, addressed to the Minister of Agriculture and NaturalResources and coursed through the Director of the Bureau of Fisheries and AquaticResources, DBP declared that it "had foreclosed the mortgage and enforced theassignment of leasehold rights on March 21, 1979 for failure of said spouses [Cubaspouces] to pay their loan amortizations." 14 This only goes to show that DBP was awareof the necessity of foreclosure proceedings.

In view of the false representation of DBP that it had already foreclosed the mortgage,the Bureau of Fisheries cancelled CUBA's original lease permit, approved the deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which werepredicated on such false representation, as well as the subsequent acts emanating from

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DBP's appropriation of the leasehold rights, should therefore be set aside. To validatethese acts would open the floodgates to circumvention of Article 2088 of the Civil Code.

Even in cases where foreclosure proceedings were had, this Court had not hesitated tonullify the consequent auction sale for failure to comply with the requirements laid down

by law, such as Act No. 3135, as amended.15

With more reason that the sale of propertygiven as security for the payment of a debt be set aside if there was no prior foreclosure proceeding.

Hence, DBP should render an accounting of the income derived from the operation of the fishpond in question and apply the said income in accordance with condition no. 12of the deed of assignment which provided: "Any amount received from rents,administration, . . . may be applied to the payment of repairs, improvements, taxes,assessment, and other incidental expenses and obligations and the balance, if any, tothe payment of interest and then on the capital of the indebtedness. . ."

We shall now take up the issue of damages.

Article 2199 provides:

Except as provided by law or by stipulation, one is entitled to an adequate compensationonly for such pecuniary loss suffered by him as he has duly proved. Such compensationis referred to as actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved withreasonable degree of certainty. 16 A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competentproof that they have been suffered by the injured party and on the best obtainable

evidence of the actual amount thereof. 17 It must point out specific facts which couldafford a basis for measuring whatever compensatory or actual damages are borne. 18

In the present case, the trial court awarded in favor of CUBA P1,067,500 as actualdamages consisting of P550,000 which represented the value of the alleged lost articlesof CUBA and P517,500 which represented the value of the 230,000 pieces of bangusallegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and theadjoining house. This award was affirmed by the Court of Appeals.

We find that the alleged loss of personal belongings and equipment was not proved byclear evidence. Other than the testimony of CUBA and her caretaker, there was no

proof as to the existence of those items before DBP took over the fishpond in question.As pointed out by DBP, there was not "inventory of the alleged lost items before the losswhich is normal in a project which sometimes, if not most often, is left to the care of other persons." Neither was a single receipt or record of acquisition presented.

Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property" asamong the damages resulting from DBP's take-over of the fishpond. Yet, it was only inSeptember 1985 when her son and a caretaker went to the fishpond and the adjoining

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house that she came to know of the alleged loss of several articles. Such claim for "losses of property," having been made before knowledge of the alleged actual loss,was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for actual damages.

With regard to the award of P517,000 representing the value of the alleged 230,000pieces of bangus which died when DBP took possession of the fishpond in March 1979,the same was not called for. Such loss was not duly proved; besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of her complaint in court inMay 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October 1979, 19 she declared:

1. That from February to May 1978, I was then seriously ill in Manila and within the sameperiod I neglected the management and supervision of the cultivation and harvest of theproduce of the aforesaid fishpond thereby resulting to the irreparable loss in the produceof the same in the amount of about P500,000.00 to my great damage and prejudice dueto fraudulent acts of some of my fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took possessionof the fishpond, did CUBA intimate that upon DBP's take-over there was a total of 230,000 pieces of bangus, but all of which died because of DBP's representativesprevented her men from feeding the fish.

The award of actual damages should, therefore, be struck down for lack of sufficientbasis.

In view, however, of DBP's act of appropriating CUBA's leasehold rights which wascontrary to law and public policy, as well as its false representation to the then Ministry

of Agriculture and Natural Resources that it had "foreclosed the mortgage," an award of moral damages in the amount of P50,000 is in order conformably with Article 2219(10),in relation to Article 21, of the Civil Code. Exemplary or corrective damages in theamount of P25,000 should likewise be awarded by way of example or correction for thepublic good. 20 There being an award of exemplary damages, attorney's fees are alsorecoverable. 21

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No.26535 is hereby REVERSED, except as to the award of P50,000 as moral damages,which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding

that condition no. 12 of the deed of assignment constituted pactum commissorium andthe award of actual damages; and by reducing the amounts of moral damages fromP100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and theattorney's fees, from P100,000 to P20,000. The Development Bank of the Philippines ishereby ordered to render an accounting of the income derived from the operation of thefishpond in question.

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Let this case be REMANDED to the trial court for the reception of the income statementof DBP, as well as the statement of the account of Lydia P. Cuba, and for thedetermination of each party's financial obligation to one another.

SO ORDERED.

Bellosillo, Vitug and Kapunan, JJ., concur.

G.R. No. 94247 September 11, 1991

DIONISIO MOJICA, in behalf of Spouses LEONARDO MOJICA (now deceased)and MARINA RUFIDO, petitioner,vs.HON. COURT OF APPEALS, and RURAL BANK OF YAWIT, INC., respondents.

Lorenzo F. Miravite for petitioner.

Esteban C. Manuel for private respondent.

PARAS, J.: p

This is a petition for review on certiorari which seeks to reverse and set aside: thedecision * of the Court of Appeals dated February 15, 1990 in AC-G.R. CV No. 05987entitled "Dionisio Mojica, in behalf of spouses Leonardo Mojica (now deceased) andMarina Rufido v. Rural Bank of Kawit, Inc.", which affirmed in toto the decision of the

trial court and (2) the resolution dated June 4, 1990 denying the motion for reconsideration.

The facts of the case as gathered from the records are as follows:

On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted a loan of P20,000.00 from defendant Rural Bank of Kawit, Inc. (now respondent). This loan wassecured by a real estate mortgage executed on the same date by the plaintiffs spousesLeonardo Mojica and Marina Rufido (Rollo, Annex "C" p. 40).

The real estate mortgage contract states among others:

... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the mortgagors ...

2. ... but if the mortgagors shall well and truly fulfill the obligation above stated accordingto the terms thereof then this mortgage shall become null and void. (Rollo Petitioner'sMemorandum, pp. 86-87)

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The spouses mortgaged to the Rural Bank of Kawit, a parcel of land consisting of 218,794 square meters, located in Naic, Cavite, covered by Transfer Certificate of TitleNo. RT-155 (Rollo, Annex "A", p. 31). The real estate mortgage was duly registeredunder Entry No. 74661 of the Registry of Deeds of Cavite (Rollo, Annex "C", p. 41).

The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid (Ibid .).

On March 5, 1974, a new loan in the amount of P18,000.00 was obtained by plaintiffsspouses from the defendant Rural Bank which loan matured on March 5, 1975 (Rollo,pp. 32; 41).

No formal deed of real mortgage was constituted over any property of the borrowers,although the top of the promissory note dated March 5, 1974, contained the followingnotation.

This promissory note is secured by a Real Estate Mortgage executed before the NotaryPublic of the Municipality of Kawit, Mrs. Felisa Senti under Doc. No. 62, Page No. 86,

Book No.__, Series of 1971.

The Real Estate Mortgage mentioned above is the registered mortgage whichguaranteed the already paid loan of P20,000.00 granted on February 1, 1971 (Rollo, p.8,7).

The spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after itsmaturity on March 5, 1975. Respondent rural bank extrajudicially foreclosed the realestate mortgage on the justification that it was adopted as a mortgage for the new loanof P18,000.00 (Rollo, pp. 32; 41).

The subject property was set for auction sale by the Provincial Sheriff of Cavite for June27, 1979. In that auction sale, defendant rural bank was the highest bidder, and its bidcorresponded to the total outstanding obligation of plaintiffs spouses Mojica and Rufido(Reno, p. 32).

The proceeds from the sale of the piece of land of plaintiffs spouses were applied totheir outstanding obligation with defendant bank (Ibid .)

The corresponding certificate of sale in favor of defendant bank was executed by theProvincial Sheriff also on June 27, 1979, and the instrument was recorded in the Officeof the Register of Deeds of Cavite on June 29, 1979. The one year period for

redemption elapses after June 1980 without plaintiffs spouses having redeemed theforeclosure property (Ibid .)

Meanwhile, on July 19, 1980, Dionisio Mojica, the son of petitioners-spouses, in anapparent attempt to pay the debt of P18,000.00 made a partial payment in the amountof P24,658.00 (P19,958.00 of this amount in check bounced) which the defendant ruralbank received and accepted with the issuance of the defendant's official receipt No. 101

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269, ackowledging the payment as partial payment of 'past due loan', together with the"interest on past due lose (Rollo, p. 33).

On August 11, 1980, another partial payment was made by Dionisio Mojica in theamount of P9,958.00 in payment also of 64 past due loan' plus "interest on past due

loan 7 which payment was received by the defendant rural bank and acknowledged withthe issuance of official receipt No. 101844. These payments were, however, consideredby the bank as deposit for the repurchase of the foreclosed property ( Ibid ., p. 33).

On August 14, 1981, upon inquiry by Dionisio Mojica on the unpaid balance of the loan,the respondent rural bank issued a 'Computation Slip" indicating therein, that as of August 14, 1981, the outstanding balance plus interest computed from March 5, 1975was P21,272.50 (Ibid .).

On November 10, 1981, said bank executed an affidavit of consolidation of ownership,which it subsequently filed with the Register of Deeds of Cavite. As a result, Transfer

Certificate of Title No. T-123964, covering the foreclosed piece of land, was issued in itsfavor by the Register of Deeds on January 19, 1982. After having consolidated itsownership over the foreclosed property, defendant bank scheduled the parcel of land tobe sold at public auction on February 26, 1982, pursuant to the requirement of the lawregarding the disposal by a bank of its acquired assets. Dionisio Mojica and oneTeodorico Rufido, brother-in-law of plaintiff Leonardo Mojica, were notified of suchauction sale However, no sale was consummated during that scheduled sale and theproperty concerned up to now still remains in the possession of respondent bank ( Ibid .).

The refusal of the same bank to allow Dionisio Mojica to pay the unpaid balance of theloan as per the "Computation Slip" amounting to P21,272.50, resulted in the filing of a

complaint (Rollo, p. 42).

On September 3, 1984, the trial court rendered judgment dismissing the complaint. OnNovember 5, 1984, petitioner filed a motion for reconsideration of the decision, whichmotion was denied in the order dated November 17, 1984. On January 2, 1985, a noticeof appeal was filed in the Intermediate Appellate Court (Rollo, p. 42).

On February 15, 1990, the Appellate Court, rendered its decision, aiming in toto thedecision of the trial court. The dispositive portion of the decision of the appellate courtreads:

WHEREFORE, finding no reversible error in the decision appealed from, the game ishereby AFFIRMED in toto. With costs against plaintiffs-appellants.

The motion for reconsideration of said decision was denied in a resolution dated June 4,1990 (Rollo, Annex "B", p. 39).

Hence, this petition.

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This Court in its resolution dated September 3, 1990 dismissed the petition for non-compliance with certain requisites but later in its resolution dated November 5, 1990, itreinstated the petition (Rollo, Petition pp. 9-28); Resolutions, pp. 52-53; 61).

The petition is devoid of merit.

The pivotal issue in this case is whether or not the foreclosure sale by the Sheriff onJune 27, 1979, had for its basis, a valid and subsisting mortgage contract. Otherwisestated, there is a need to ascertain the intention of the parties as to the coverage of themortgage in question with respect to future advancements.

Contracts which are not ambiguous are to be interpreted according to their literalmeaning and should not be interpreted beyond their obvious intendment (Plastic TownCenter Corp. v. NLRC, 172 SCRA 580 [1989]). Thus, where the intent of the parties hasbeen shown unmistakably with clarity by the language used, the literal meaning shallcontrol (Paramount Surety & Ins. Co., Inc. v. Ago, 171 SCRA 481 [1989]).

Correspondingly, stipulations in the mortgage document constitute the law between theparties, which must be complied with faithfully (Community and Loan Assn., Inc. v.Court of Appeals, 153 SCRA 564 [1987]).

As earlier stated, the Real Estate Mortgage in the case at bar expressly stipulates that itserves as guaranty —

... for the payment of the loan ... of P20,000.00 and such other loans or other advancesalready obtained or still to be obtained by the mortgagors as makers ... (Rollo, p. 14).

It has long been settled by a long line of decisions that mortgages given to secure futureadvancements are valid and legal contracts; that the amounts named as consideration

in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is acontinuing security and is not discharged by repayment of the amount named in themortgage, until the full amount of the advancements are paid (Lim Julian v. Lutero, 49Phil. 704-705 [1926]). In fact, it has also been held that where the annotation on theback of a certificate of title about a first mortgage states "that the mortgage secured thepayment of a certain amount of money plus interest plus other obligations arising thereunder' there was no necessity for any notation of the later loans on the mortgagors' title.It was incumbent upon any subsequent mortgagee or encumbrances of the property inquestion to e e the books and records of the bank, as first mortgagee, regarding the

credit standing of the debtors Tady-Y v. PNB, 12 SCRA 19-20 [1964]).

The evidence on record shows that the amounts of P4,700.00 and P9,958.00 wereaccepted by the bank on July 19 and August 11, 1980 as deposits for conventional redemption after the property covered by real estate mortgage became the acquiredasset of the bank and priced at P85,000.00 and after petitioner had lost all rights of legal redemption because more than one year had already elapsed from June 29, 1979,the date the certificate of sale was registered in the office of the Registry of Deeds of

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Cavite. Indeed, the conventional redemption was subject to be exercised up to March 3,1982 and was extended up to April 19, 1982 for a fixed amount of P85,000.00. Therespondent bank even favored the petitioner by giving them the first preference torepurchase the property but they failed to avail of this opportunity, although the bank "iscertainly disposed to release at anytime" the deposits.

Further, the evidence on record also shows that the mortgage property was auctionedon June 27, 1979. The only bidder was the respondent bank which bid for P26,387.04.As the highest bidder, the respondent bank can rightfully consolidate its title over theproperty. As aptly stated by respondent Court:

It would then be unfair to impute that the trial court allowed defendant bank to appropriatethe mortgage property, because after the plaintiff-appellants failed to repurchase theproperty and filed this action with 'lis pendens', the actions prevented the bank fromnegotiating for the sale of the property to other buyers. (p. 36, Rollo)

PREMISES CONSIDERED, the petition is DISMISSED and the assailed decision and

resolution of the Intermediate Appellate Court (Court of Appeals) are AFFIRMED.

SO ORDERED.

Melencio-Herrera (Chairperson), Padilla and Regalado, JJ., concur.

Sarmiento, J., is on leave.

G.R. No. 77502 January 15, 1988

EMILIA B. SANTIAGO, plaintiff-appellant,vs.PIONEER SAVINGS AND LOAN BANK, ET. AL., defendants-appellees.

MELENCIO-HERRERA, J.:

An appeal certified by the Court of Appeals to this Tribunal for determination since onlya question of law is involved.

The facts are not controverted.

Plaintiff-appellant, Emilia P. Santiago, is the registered owner of a parcel of landsituated at Polo, Valenzuela, Metro Manila, with an area of approximately 39,007square meters, covered by T.C.T. No. B-41669 (briefly, the Title) of the Register of Deeds of Caloocan City (hereinafter, simply the Disputed Property).

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On 7 April 1983, plaintiff-appellant executed a Special Power of Attorney in favor of Construction Resources Corporation of the Philippines (CRCP, for short) authorizingand empowering CRCP:

1. To borrow money and make, execute, sign and deliver mortgages of real estate nowowned by me and standing in my name and to make, sign, execute and deliver any andall promissory notes necessary in the premises.

2. For the purpose of these presents, or for the purpose of securing the payment of anyloan, indebtedness or obligation which my attorney-in-fact may obtain or contract with thebank, its renewal, extension of payment of the whole or any part thereof, said attorney-in-fact is hereby authorized and empowered to transfer and convey by way of mortgage infavor of the bank, ... (the Disputed Property).

On 8 April 1983, CRCP executed a Real Estate Mortgage over the Disputed Property infavor of FINASIA Investment and Finance Corporation to secure a loan of P1 million.The mortgage contract specifically provided that in the event of default in payment, themortgagee may immediately foreclose the mortgage judicially or extrajudicially. The

promissory note evidencing the indebtedness was dated 4 March 1983.

The Special Power of Attorney executed by plaintiff-appellant in CRCP's favor, the RealEstate Mortgage by CRCP in favor of FINASIA, together with the Board Resolutiondated 28 March 1983 authorizing the CRCP President to sign for and on its behalf, wereduly annotated on the Title on 12 April 1983.

On 29 July 1983, FINASIA executed in favor of defendant-appellee, Pioneer Savings &Loan Bank, Inc. (Defendant Bank, for brevity), an "Outright Sale of Receivables withoutRecourse" including the receivable of P610,752.59 from CRCP.

On 21 May 1984, FINASIA executed a "Supplemental Deed of Assignment" in favor of Defendant Bank confirming and ratifying the assignment in the latter's favor of thereceivable of P610,752.59 from CRCP and of the mortgage constituted by CRCP over the disputed property.

On 12 July 1984, the aforesaid Supplemental Deed of Assignment was inscribed on theTitle.

CRCP failed to settle its obligation and Defendant Bank opted for extrajudicialforeclosure of the mortgage. The notice of auction sale was scheduled on 16 May 1985.

On 13 May 1985, on learning of the intended sale, plaintiff-appellant filed before theRegional Trial Court of Valenzuela, Metro Manila, Branch CLXXII, an action for declaration of nullity of the real estate mortgage with an application for a Writ of Preliminary Injunction (Civil Case No. 2231-V-55).

On 14 May 1985, the Trial Court 1 issued a Temporary Restraining Order enjoining thesale at public auction of the Disputed Property.

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Basically, plaintiff-appellant claimed in her Complaint that she was not aware of any realestate mortgage she had executed in favor of Defendant Bank; that she had notauthorized anyone to execute any document for the extrajudicial foreclosure of the realestate mortgage constituted on the Disputed Property and that since the notice of Sheriffs sale did not include her as a party to the foreclosure proceedings, it is not

binding on her nor on her property.

Defendant Bank opposed the application for Preliminary Injunction and asserted its rightto extrajudicially foreclose the mortgage on the Disputed Property based on recordedpublic documents.

During the hearing on the petition for Preliminary Injunction, plaintiff-appellant, throughcounsel, admitted the due execution of plaintiff-appellant's Special Power of Attorney infavor of CRCP, the Real Estate Mortgage by CRCP to FINASIA, the Outright Sale of Receivables by FINASIA to Defendant Bank, as well the Supplemental Deed of Assignment by FINASIA to Defendant Bank.

On 30 May 1985, the Trial Court granted the Petition for Preliminary Injunction enjoiningthe public auction sale of the mortgaged property upon plaintiff-appellant's posting of abond in the amount of P100,000.00.

On 7 June 1985, Defendant Bank filed a Motion to Dismiss the main case on the groundthat the complaint did not state a cause of action followed on 24 June 1985 with aMotion for Reconsideration of the Order granting the Writ of Preliminary Injunction, bothof which Motions plaintiff-appellant opposed.

On 30 August 1985, the Trial Court reconsidered its Order of 30 May 1985, dissolved

the Writ of Preliminary Injunction, and ordered the dismissal of the case for lack of cause of action.

Plaintiff-appellant appealed to the Court of Appeals, which, as stated at the outset,certified the case to us on a pure question of law.

In the meantime, with the dissolution of the Preliminary Injunction, it appears thatdefendant Bank completed its extrajudicial foreclosure and the Disputed Property wassold at public auction on January 1986, after a re-publication of the notice of sale, sincethe first scheduled sale was enjoined by the Trial Court.

Plaintiff-appellant maintains that:

I. The Lower Court erred in dismissing the complaint and lifting the Preliminary Injunctionby relying solely on the admission of the counsel of the plaintiff-appellant of certaindocumentary exhibits presented by the counsel of the defendant-appellee.

II. The Lower Court erred in relying on the case of Wenceslao Vinzons Tan vs. Director of Forestry which it qualifies as "on all fours with the case at bar."

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III. The Lower Court erred in ignoring the pertinent doctrines in the Supreme Court casescited by the plaintiff-appellant in her Opposition to Motion to Dismiss.

IV. The Lower Court erred in holding that notice of the scheduled sale of the land sent tothe agent (CRCP) is also Notice to the principal (Plaintiff Appellant), the land owner.

and prays that she be given "a real day in Court" so that she may testify and give her side of the case.

Upon the factual and legal context, the errors assigned are without merit.

It is true that the determination of the sufficiency of a cause of action must be limited tothe facts alleged in the Complaint and no other should be considered. 2 In this case,however, a hearing was held and documentary evidence was presented, not on theMotion to Dismiss but on the question of granting or denying plaintiff-appellant'sapplication for a Writ of Preliminary Injunction, Counsel for plaintiff-appellant admittedan the evidence presented. That being so, the Trial Court committed no reversible error

in considering said evidence in the resolution of the Motion to Dismiss.

Furthermore, "even if the complaint stated a valid cause of action, a motion to dismiss for insufficiency of cause of action will be granted if documentary evidence admitted bystipulation disclosing facts sufficient to defeat the claim enabled the court to go beyonddisclosure in the complaint" (LOCALS No. 1470, No. 1469, and No. 1512 of theInternational Longshoremen's Association vs. Southern Pacific Co., 6 Fed. Rules Service,p. 107; U.S. Circuit Court of Appeals, Fifth Circuit, Dec. 7, 1952; 131 F. 2d 605). Thus,although the evidence of the parties were presented on the question of granting or denying petitioner-appellant's application for a writ of preliminary injunction, the trial courtcorrectly applied said evidence in the resolution of the motion to dismiss. ... 3

While, as contended by plaintiff-appellant, some aspects of this case differ from those inTan, the doctrinal ruling therein, as quoted above, is squarely applicable to the case atbar. The cases which plaintiff-appellant cites express the general rule when there is no"documentary evidence admitted by stipulation disclosing facts sufficient to defeat theclaim." Where, however, such evidence is before the Court and has been stipulatedupon, a Court can go "beyond the disclosure in the complaint." 4

Moreover, the rule is explicit that "rules of procedure are not to be applied in a very rigid,technical sense; rules of procedure are used only to help secure substantial justice." 5

The evidence on record sufficiently defeats plaintiff-appellant's claim for relief fromextrajudicial foreclosure. Her Special Power of Attorney in favor of CRCP specificallyincluded the authority to mortgage the Disputed Property. The Real Estate Mortgage infavor of FINASIA explicitly authorized foreclosure in the event of default. Indeed,foreclosure is but a necessary consequence of non-payment of a mortgageindebtedness. Plaintiff-appellant, therefore, cannot rightfully claim that FINASIA, as theassignee of the mortgagee, cannot extrajudicially foreclose the mortgaged property. Amortgage directly and immediately subjects the property upon which it is imposed to thefulfillment of the obligation for whose security it was constituted. 6

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The assignment of receivables made by the original mortgagee, FINASIA, to DefendantBank was valid, since a mortgage credit may be alienated or assigned to a third person,in whole or in part, with the formalities required by law. 7 Said formalities were compliedwith in this case. The assignment was made in a public instrument and proper recordingin the Registry of Property was made. 8 While notice may not have been given to

plaintiff-appellant personally, the publication of the Notice of Sheriff's Sale, as requiredby law, is notice to the whole world.

The full-dress hearing that plaintiff-appellant prays for wherein she intends to prove thatshe tried to contact the President of CRCP to urge him to pay the mortgage loan, thatshe had failed to do so despite several attempts; that she did not know that FINASIAhad sold its receivables including that of CRCP to Defendant Bank; and that she wasnot informed by CRCP of the scheduled foreclosure sale will not tilt the scales of justicein her favor in the face of incontrovertible documentary evidence before the Court.

Plaintiff-appellant's recourse is against CRCP, specially considering her allegation that

the latter had failed to observe their agreement.

WHEREFORE, the Order appealed from is hereby AFFIRMED, with costs againstplaintiff-appellant.

SO ORDERED.

Yap, Chairman, Paras, Padilla and Sarmiento, JJ., concur.

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 REGIONALSHERIFF OF CALOOCAN CITY, respondents.

VITUG, J.: p

Would it be valid and effective to have a clause in a chattel mortgage that purports tolikewise 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 thecompany, a chattel mortgage in favor of private respondent Producers Bank of thePhilippines. 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 wasto this effect —

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

In case the MORTGAGOR executes subsequent promissory note or notes either as arenewal 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 billsof exchange, releases of import shipments on Trust Receipts, etc., this mortgage shallalso 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 mortgageshall 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 assecurity for said obligations and any and all other obligations of the MORTGAGOR to theMORTGAGEE of whatever kind and nature, whether such obligations have beencontracted 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 financialaccommodations totalling P2,700,000.00. 2 These borrowings were on due date also

fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation aloan 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. 3

Respondent bank thereupon applied for an extra judicial foreclosure of the chattelmortgage, 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 writof preliminary injunction, before the Regional Trial Court of Caloocan City (Civil CaseNo. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosureof the chattel mortgage. It held petitioner corporation bound by the stipulations,

aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991,affirmed, "in all 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 March1992 by this Court for having been insufficient in form and substance. Privaterespondent filed a motion to dismiss the petition while petitioner corporation filed acompliance and an opposition to private respondent's motion to dismiss. The Courtdenied petitioner's first motion for reconsideration but granted a second motion for

reconsideration, thereby reinstating the petition and requiring private respondent tocomment thereon. 5

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

which the 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 Courtprescribing technical and other procedural requirements are meant to weed outunmeritorious petitions that can unnecessarily clog the docket and needlessly consume

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the time of the Court. These technical and procedural rules, however, are intended tohelp 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 dispensationof justice is the core reason for the existence of courts. In this instance, once again, theCourt 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, suchas a guaranty or a suretyship, the faithful performance of the obligation by the principaldebt or is secured by the personal commitment of another (the guarantor or surety). Incontracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillmentis secured by an encumbrance of property — in pledge, the placing of movable propertyin the possession of the creditor; in chattel mortgage, by the execution of thecorresponding 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 essentialcondition that if the obligation becomes due and the debtor defaults, then the propertyencumbered can be alienated for the payment of the obligation, 7 but that should theobligation be duly paid, then the contract is automatically extinguished proceeding fromthe accessory character 8 of the agreement. As the law so puts it, once the obligation iscomplied 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, 10 a chattelmortgage, however, can only cover obligations existing at the time the mortgage is

constituted. Although a promise expressed in a chattel mortgage to include debts thatare yet to be contracted can be a binding commitment that can be compelled upon, thesecurity itself, however, does not come into existence or arise until after a chattelmortgage agreement covering the newly contracted debt is executed either byconcluding a fresh chattel mortgage or by amending the old contract conformably withthe form prescribed by the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute anact of default on the part of the borrower of the financing agreement whereon thepromise is written but, of course, the remedy of foreclosure can only cover the debtsextant at the time of constitution and during the life of the chattel mortgage sought to beforeclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially withthe 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 wouldstill be valid between the parties (not against third persons acting in good faith 12),the fact, however, that the statute has provided that the parties to the contractmust execute an oath that —

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. . . (the) mortgage is made for the purpose of securing the obligation specified in theconditions thereof, and for no other purpose, and that the same is a just and validobligation, 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 obligationthat 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 loanwhich petitioner corporation later fully paid. By virtue of Section 3 of the ChattelMortgage Law, the payment of the obligation automatically rendered the chattelmortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs.Magallanes Press, Inc ., et al ., 14 the Courtsaid —

. . . A mortgage that contains a stipulation in regard to future advances in the credit willtake 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 1978chattel mortgage had ceased to exist coincidentally with the full payment of theP3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should beremanded to the trial court for a specific finding on the amount of damages it hassustained "as a result of the unlawful action taken by respondent bank against it." 17

This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc . vs. Court of Appeals,19 we have said:

Moral damages are granted in recompense for physical suffering, mental anguish, fright,serious anxiety, besmirched reputation, wounded feelings, moral shock, socialhumiliation, and similar injury. A corporation, being an artificial person and havingexistence only in legal contemplation, has no feelings, no emotions, no senses; therefore,it cannot experience physical suffering and mental anguish. Mental suffering can beexperienced only by one having a nervous system and it flows from real ills, sorrows, andgriefs 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 statesthat 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'scause. It instead turned out to be, however, a source of disappointment for this Court toread 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, respondentCourt of Appeals should be required to justify its decision which completely disregarded

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the basic laws on obligations and contracts, as well as the clear provisions of the ChattelMortgage Law and well-settled jurisprudence of this Honorable Court; that in the eventthat its explanation is wholly unacceptable, this Honorable Court should imposeappropriate sanctions on the erring justices. This is one positive step in ridding our courtsof law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction. 21 (Emphasis supplied.)

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

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respectdue to the courts of justice and judicial officers and . . . (to) insist on similar conduct byothers." 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 supremeimportance." And it is through a scrupulous preference for respectful language that alawyer best demonstrates his observance of the respect due to the courts and judicialofficers . . . 23

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

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

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

SO ORDERED.

Kapunan and Hermosisima, Jr., JJ., concur.

Padilla, J., took no part.

Bellosillo, J., ic on leave.

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