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G.R. No. L-32762 January 27, 1983

CRISTINA PENULLAR, petitioner, vs. PHILIPPINE NATIONAL BANK, respondent.Teodoro T Junio for petitioner.

Antonio M. Ramos for respondent PNB.

GUTIERREZ, JR., J. :

The principal issue raised in this petition is whether ornot the Court of Appeals, even as it sustained the trialcourt's finding that the titles covering the disputedparcels of land are null and void, could still declarethat the mortgages annotated on those titles are valid.

The Court of Appeals stated the facts of this case asfollows:

RESOLVING: On Appeal Civil Case No. D-894 of theCourt of First Instance of Pangasinan instituted by

Cristina P. Penullar against Florencio Felix et. al., fordeclaration of absolute nullity of judicial proceedingsin which after filing of the complaint on 9 May, 1959,answer on 27 May, 1959 by the Philippine NationalBank stipulation of facts on 1 February, 1967 andhearing on 11 August 1967 with only plaintiffpresenting evidence purely documentary there wasafter that promulgated decision disposing.

WHEREFORE, in view of all the foregoing the Courtrules that:

(1) that the proceedings made under LandRegistration Case No. 16347 are null and void;

(2) that all the titles issued by the Land RegistrationCourt pursuant to the said Land Registrationproceedings, as well as all Certificate of Title flowingfrom the said original title are null and void;

(3) that the land covered by this case are theregistered properties of the plaintiff over which sheholds an irrevocable and indefeasible title over thesame;

(4) that the writ of possession issued by the landregistration court on 26 of September 1958 inconnection with Land Registration Case No. 16347 is

null and void; (5) that since the plaintiff has beenfound to be the sole and absolute owner of theproperties in question, the defendants are herebyordered to vacate the same and to surrender thepossession as well as the ownership thereof in favorof the plaintiff;

(6) that the defendants are required to render a trueand faithful accounting of the fruits of the saidproperties from September 26, 1958 until the

possession of the plaintiff has been restored, and toindemnify value of said products as may be found insaid accounting. The defendants are likewise orderedto pay the costs of this suit.

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which defendant Philippine National Bank has takenhere on appeal on the errors assigned in its brief;

IT APPEARING: That the antecedents are rathercomplicated; it will be the task of this Court to simplify;on 27 February, 1936 claiming that she was theabsolute owner but that therein defendants were

pretending to have an interest in the property and hadintruded sometime in December, 1935, GenovevaMiguel filed Civil Case No. 7199 in the Court of FirstInstance of Pangasinan against Praxedes Moya et al.,predecessors of herein plaintiff Cristina Penullar, fordeclaration of ownership over three (3) portions ofagricultural land situated at Bayambang, Pangasinan;Praxedes Moya and companions presented theiranswer in due time Exh. A-1; while that Civil Case No.7199 was pending, Genoveva Miguel presentedformal application for registration of her title on 1February, 1938 in land Case No. 16347; andPraxedes Moya opposed on 10 June, 1938 Exh. B-3;well then on a date which is not very clear in therecords but during the pendency of both Civil Case

No. 7199 and the land registration Case No. 160.47,Praxedes Moya was able to obtain free patent overthe property and unto her was issued originalcertificate of title No. 3148 and on another parcel alsowas issued a free patent in the name of one JosefaSison also one of herein plaintiff's predecessors andunto her was issued Original Certificate of Title No.2932; in both cases, Civil Case No. 7199 andExpediente 16347 trial Judge issued order on 15February, 1940 suspending hearing in order to give achance to Genoveva Miguel to investigate the OriginalCertificates of Title No, 3148 and 2932 Exh. A-4,issuing a supplementary order on 11 September,1940 that said cases be held in abeyance,

Until after the Department of Agriculture andCommerce pass upon the complaint that GenovevaMiguel and others have made for the cancellation orwithdrawal of the free 'patent certificate issued in thename of Praxedes Moya and others.

the parties shall immediately notify the Court soonafter the Department of Agriculture and Commercerenders any action on said claim. 'Exh. B- 6;

but nothing more happened with respect to thecancellation of the free patents; and so it was that, on22 May, 1947 Exh. A-7 because

since September 11, 1940 up to this date, the plaintiffhas failed to take any steps for the prosecution of heraction.

trial Judge in Civil Case No. 7199 dismissed the case,

without prejudice and without pronouncement as tocosts,

and what Genoveva Miguel instead did after that wasto prosecute the registration case and after the samehad been finally heard, in the absence of PraxedesMoya, et. al., the Registration Court promulgated itsdecision on 20 December, 1955 ordering theinscription of the properties now in question in thename of applicant Genoveva Miguel's heirs becauseshe had died in the meantime and as the judgmentafterwards became final: Genoveva Miguel or betterstated her successors in interest applied for a writ ofpossession which was granted the Registration Courton 25 September, 1958 and it was executed by theSheriff on 30 September, 1958 but in the words of theSheriff, herein plaintiff successor in interest ofoppositor Praxedes Moya,

vehemently objected to the possession of theapplicant,'

and a few months after that herein plaintiff CristinaPenullar filed the present Civil Case No, T-894 forannulment of the Registration Proceeding specificallythe decision rendered therein and the titles issuedpursuant to that in the name of the heirs of GenovevaMiguel, namely Original Certificates No. 14242,24244, 24240, 14238, 24313 as well as theincumbrance by way of mortgage constituted by thesaid adjudicatees in favor of the Philippine NationalBank, on the Position that the lands having already

been registered, although by way of free patent, the

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titles in the names of Praxedes Moya and JosefaSison, predecessors in interest of Cristina Penullarbecame an absolute bar against posterior registrationand in the trial of the case plaintiff submitted her caseon the basis of aforementioned documentary proofsconstituting of Exhs. A to 0, against this, PhilippineNational Bank in its answer p. 23 R.A. submitted asspecial defense that it was an innocent mortgagee forvalue having granted loans to the adjudicatees in theregistration case namely Maximo Alejo, FilomenoDomingo, Serafina Gascon relying on their titles

which appeared to be genuine, issued in due courseand regular on their face; and it is to be stated that thefact of this constitution of the mortgages in favor ofthe Philippine National Bank by the said adjudicateessuccessors in interest of Genoveva Miguel does notappear to be debated; but trial Judge after hearing thecase held for Cristina Penullar successor in theinterest of Praxedes Moya and Josefa Sison andannulled the titles issued pursuant to the decision ofthe Land Registration Court in favor of the successorsin interest of Genoveva Miguel; ...

The respondent Court of Appeals modified theappealed decision to the effect ... that the mortgages

in favor of Philippine National Bank attacked byplaintiff are hereby declared valid.' In all otherrespects, the decision of the lower court was affirmed.(Annex " D ", p. 18, rollo)

Not satisfied with the modified decision, plaintiff-appellee Cristina Penullar filed a motion forreconsideration and when the motion was denied bythe respondent court, filed the instant petition.

The petitioner assigns the following errors:

I

THE COURT OF APPEALS ERRED IN HOLDING ASVALID THE MORTGAGES NEVER ANNOTATED INPETITIONER'S TITLES BUT IN THE VOID TITLESOF RESPONDENT'S CO-DEFENDANTS.

II

THE COURT OF APPEALS ERRED INADJUDICATING RESPONDENT'S APPEAL UPONAN ISSUE NOT RAISED IN THE PLEADINGSBEFORE ITSELF NOR BEFORE THE TRIALCOURT.

III

THE COURT OF APPEALS ERRED IN RESORTINGTO PALPABLY UNTENABLE THEORIES ANDPOSTULATES TO JUSTIFY ITS DECISION.

The main issue centers on the ruling of the Court ofAppeals' sustaining the validity of the mortgages infavor of the respondent Philippine National Bank.

The petitioner contends: 1. that the Court of Appealsdid not have a basis to rule on the matter since the

issue of the Philippine National Bank as a mortgageein good faith was never raised before the trial courtand the Court of Appeals, and 2. under the factsobtaining in the case was not justified in ruling thatrespondent Philippine National Bank's mortgageswere valid.

The record on Appeal filed by the Philippine NationalBank shows that in the Answer of the bank, there wasalleged the special defense .. that the PhilippineNational Bank, a credit institution, in the ordinarycourse of business, in good faith and for valuableconsideration, is an innocent purchaser havinggranted loans to Maximo Alejo. ... and to Filomeno

Domingo and Serafina Gascon ... under the securityof Torrens Title issued to the borrower and relying onthe fact of the same which appeared to be genuine,regular and in due form." (Record on Appeal, p. 24)Moreover, respondent Philippine National Bank on thevery theory that it was a mortgage in good faith filed aMotion to Dismiss the case as against it. (Record on

Appeal, pp. 31-34) And this motion was subject toanother URGENT MOTION for Resolution filed byrespondent Philippine National Bank (Record on

Appeal, pp. 39-40).1wph1.t The same motionprompted the petitioner plaintiff in the trial court, to filean Opposition thereto, (Record on Appeal, PP- 40-41)which in turn led the respondent Philippine NationalBank to file a Reply to the Opposition. (Record on

Appeal pp, 48- 50).

In its appeal to the Court of Appeals, the PhilippineNational Bank maintained its position that it was amortgagee in good faith. Thus, in the third

Assignment of Error of its brief filed before theappellate court, the Philippine National Bankadequately discussed its being a mortgagee in goodfaith. The first proposition is without merit.

The second proposition covered by the first and thirdassignments of errors is premised on the followingarguments: Since the torrens titles whereinrespondent Philippine National Bank's mortgageswere annotated were declared void, necessarily the

same mortgages annotated in the said torrens titleshould also be declared void, on the theory that amortgage is but an accessory contract. The petitionermaintains that her torrens title should not answer forthe same mortgages since the latter were notannotated considering the "fundamental principle ofregistration that Torrens titles are affected only by theencumbrance registered and annotated in said titles."Furthermore, she argues that to validate themortgages annotated in the void titles of PhilippineNational Bank's co-defendants but never annotated in

her torrens titles would in effect revalidate the voidtitles to co-exist with her valid title.

The petitioner considers the ruling of the Court ofAppeals inconsistent because according to her novalid lien could emanate from a void title.

The petitioner's arguments have no merit. The Courtof Appeals fully explained the reasons why themortgages annotated in the void torrens titles shouldbe considered valid. Thus:

... now in resolving this question let it be granted that

there is clear logic in the position of appellees that thetitles of the heirs of Genoveva Miguel mortgagors toPhilippine National Bank having been declared void,on the principle that the rights of Philippine NationalBank being dependent upon those void titles,Philippine National Bank should not be permitted topretend that its mortgages should be considered avalid encumbrance upon the property, for it is like thebranch of a dead tree so to speak but the trouble isthat cases cannot be decided upon pure logic; the factof the matter is that the Bank relief upon regularTorrens Titles issued pursuant to a regular judgmentof the registration Court: there is no showing,absolutely no showing, that the Bank was madespecifically aware of the fact that the very property

already covered by the free patents were onlyafterwards adjudicated to and Torrens Titles issued inthe name of the heirs of Genoveva Miguel, who werethe parties that afterwards had secured themortgages from the Bank, not only this, thedeclaration of nullity of the titles of the heirs ofGenoveva Miguel due to the fact that there hadalready been free patents issued in the name ofplaintiff's predecessors Praxedes Moya and JosefaSison came in only much later and in fact as of thetime when these mortgages were accepted by theBank, there was as yet no decision declaring the titlesof the mortgagors null and void; stated otherwisethere can be no denying the fact that the Bank wasmade to rely and had the right to rely upon regularcertificates of title first presented to it by the

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mortgagors; ... (Rollo, pp. 17-18)

The foregoing findings and conclusions of therespondent Court are sustained by rulings inprecedent cases.

In Director of Lands v. Abache (73 Phil. 606) theprincipal issue hinged on whether or not the mortgagelien annotated on the torrens title which was declarednull and void should likewise be ordered null and void.

We said:

Where, however, innocent third persons, relying onthe correctness of the certificate of title thus issued,acquire rights over the property, the court cannotdisregard such rights and order the total cancellationof the certificate. The effect of such an outrightcancellation would be to impair public confidence inthe certificates of title, for everyone dealing withproperty registered under the Torrens System wouldhave to inquire in every instance as to whether thetitle has been regularly or irregularly issued by thecourt. And this is contrary to the evident purpose ofthe law. Section 39 of Act No. 496 provides that every

person receiving a certificate of title in pursuance of adectree of registration, and every subsequentpurchaser of registered land who takes a certificate oftitle for value in good faith, shall hold the same free ofall encumbrance except those noted on saidcertificate. We have heretofore emphasized, and doso now, that every person dealing with registered landmay safely rely on the correctness of the certificate oftitle issued therefor and the law will in no way obligehim to go behind the certificate to determine thecondition of the property .

Resolving a similar issue in Blanco, et al. v.Esquierdo, et al. (110 Phil. 495) this Court ruled:

That the certificate of title issued in the name ofFructuosa Esquierdo (mortgagor) is a nullity, thesame having been secured thru fraud, is not here inquestion. The only question for determination iswhether the defendant bank is entitled to theprotection accorded to 'innocent purchasers for value',which phrase, according to sec. 38 of the LandRegistration Law, includes an innocent mortgagee forvalue. The question, in our opinion, must beanswered in the affirmative.

The trial court, in the decision complained of, madeno finding that the defendant mortgagee bank was aparty to the fraudulent transfer of the land to

Fructuosa Esquierdo. Indeed, there is nothing alleged

in the complaint which may implicate said defendantmortgagee in the fraud, or justify a finding that it actedin bad faith. On the other hand, the certificate of titlewas in the name of the mortgagor FructuosaEsquierdo when the land was mortgaged by her to thedefendant bank. Such being the case, the saiddefendant bank, as mortgagee, had the right to relyon what appeared in the certificate and, in theabsence of anything to excite suspicion, was under noobligation to look beyond the certificate andinvestigate the title of the mortgagor appearing on the

fact of said certificate. (De Lara, et. al. vs. Ayroso 95Phil. 185; 50 Off. Gaz., [101 4838; Joaquin vs.Madrid, et al., 106 Phil. 1060). Being thus an innocentmortgagee for value, its right or lien upon the landmortgaged must be respected and protected, even ifthe mortgagor obtained her title thereto thru fraud. ...

In the instant case, the Philippine National Bank reliedon the torrens titles of the mortgagors which had beenregularly issued. The torrens titles were the result ofregular land registration proceedings duly registeredwith the Register of Deeds. There was nothing in thetorrens titles which would excite suspicion that thesame were fraudulently processed by the mortgagors.

Applying, therefore, the principles enunciated in theafore- cited cases, the respondent Bank was not dutybound to further investigate the validity and/orinvalidity of the torrens title.

The assertion that the Philippine National Bank couldnot be an innocent mortgagee in good faithconsidering that the same parcel of land covered bythe invalidated titles was previously mortgaged by:first, Domingo Cayabyab, a predecessor-in-interest ofthe petitioner and second, by the petitioner herselfunder Transfer Certificate of Title No. 8822 to therespondent Philippine National Bank is not well-taken.

An examination of the technical descriptions of theparcels of land covered by the three subject torrens

titles shows that they are different from each otherand there is no way for a reader to detect that the voidtorrens titles covered the same parcels of land inTransfer Certificate of Title No. 8822, previouslymortgaged to the respondent Bank. Thus, TransferCertificate of Title No. 8822 has the followingtechnical description of the land it covers:

A parcel of land Plan F-61451, situated in the barrio ofPant-at Municipality of Bayambang, Province ofPangasinan, Islands of Luzon, Bounded on theNortheast by Lot No. 1-B of Plan Psd 8364, Lot No. 1of Plan Psu-30431-Amd. and Lot No. 2 of plan Psu-37494 vs. Lot No. 2 of plan Psu 30431 Amd. on theSoutheast, by property of Josefa Sison de Mananzan,

on the Southwest, by properties of Maximiano Felixand Heirs of Martin Palisoc, and on the Northwest byLot No. 5 of plan Psu-103094, and Lot No. 1-B of planPsd 8364. Containing an area of ONE HUNDREDFIVE THOUSAND TWO HUNDRED SEVENTYEIGHT (105,278), square meters more or less.Surveyed under authority of Sections 41, 43, Act No.2874 and in accordance with existing regulations ofthe Bureau of Lands by Pedro Terrado, Private LandSurveyor, on Dec. 17, 1933.

On the other hand, the technical description of theparcel of land awarded to Maximo Alejo, mortgagor inone of the subject mortgages in favor of therespondent Bank, which appears in the writ ofpossession issued by the cadastral court in the voidedland registration proceedings and which necessarilymust have been included in the Original Certificate ofTitle No. 14240 issued in the name of the sameMaximo Alejo reads:

4. A parcel of land (Lot No. 3, plan Psu-103094).Bounded on the NE, by property of Gregorio de Leon& Domingo Rodriguez (before) Onofre Sison Abalos(now); on the SE. by lot No. 2; on the SW. by

properties of Flaviano Junio and Vicente Castillo; andon the NW. by Lot No. Area 14,807 square meters.

Adjudicated in favor of Maximo Alejo.

The technical description of the parcel of landawarded to Filomeno Domingo, the mortgagor in theother mortgage in favor of respondent PhilippineNational Bank, which description necessarily musthave been inscribed on Transfer Certificate of TitleNo. 24313 issued in his name reads:

1. A parcel of land (Lot No. 1, plan Psu-103094).Bounded on the N. and NW. by Lot No. 2; onthe NE. by property of Gregorio de Leon & Domingo

Rodriguez (before) Onofre Sison Abalos (now); on theSE. by Vecinal Road (before) heirs of GermanMaramba (now); and on the SW. by properties ofFaustino Pinto and Filemon Padua. Area 27,463square meters. Adjudicated in favor of Florencio Felix.

2. A parcel of land (Lot No. 2, Plan Psu-103094).Bounded on the NE: by property of Gregorio de Leon& Domingo Rodriguez before Onofre Sison Abalos(now); on the SE. and S. by Lot No. 1; on the SW. byproperty of Flaviano Junio and on the NW. by Lot No.3. Area 26,870 square meters. Adjudicated in favor ofFlorencio Felix.

We agree with the invocation by the Court of Appeals

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of the principle of equity:

... if there be any doubt as to the correctness of thissolution this court might as well invoke the principlethat where one of two innocent parties must have tosuffer due to the act of a third person, he whosenegligence had caused the damage should be madeto bear the loss; in the present case if 'he heirs ofGenoveva Miguel, that is to say herein plaintiff hadonly been diligent, and had appealed from the

decision in the registration case, no certificate of Titlewould have been issued just like that in the name ofthe heirs of Genoveva Miguel and no mortgage couldhave been constituted by them in favor of Bank but asit is, said successors of Praxedes Moya and JosefaSison failed to do that; instead they let the decision inthe registration case gain the status of finality; allowedwithout prior protest, the certificate of title to beissued; did not even as early as possible, annotate anadverse claim on the "titles; and they filed this caseonly several months afterwards, it was theirnegligence that permitted said adjudicatees in thesaid registration case to apply for and securemortgages from the Bank.

The petitioner argues that neither she nor herpredecessors could have appealed the decision in theland registration proceedings because: 1) herpredecessors were already dead at the time of thepromulgation of the decision, and 2) she was notsubstituted as a party nor was she aware of saidregistration proceedings, 3) petitioner's predecessorPraxedes Moya who was aware of the landregistration proceedings had the right to rely on theprevious suspension of the land registrationproceedings; and 4) petitioner's predecessor had theright to rely on the dismissal of Civil Case No. 7199filed by respondent's co-defendant against;petitioner's predecessors for "declaration ofownership 'over the subject, parcels of land and that

nobody notified petitioner or her predecessors of therevival of the void subsequent registrationproceedings.

The arguments are not well-taken. The records showthat Praxedes Moya, predecessor-in-interest of thepetitioner, was fully aware of the subject landregistration proceedings. From the stipulation of theFacts" alone, the extent of her knowledge can begleaned Thus:

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(7) That Notice of Hearing of the Registration Case

No. 16347, G.L.R.O. Record No. 52435, dated July11, 1955 was issued by the Court, setting the trial forOctober 6, 1955.

(8) Copy of this Notice of Hearing was sent byregistered mail, under Registered letter No. 118,which was received by counsel for Praxedes Moya

Atty. Jose M. Garcia, on July 22, 1955, as evidencedby Registry Return Card of letter No. 118 attached inthe Record of the said registration case on page 148;

and,

(9) Praxedes Moya herself received or. July 23, 1955copy of the Notice of Hearing as evidenced byRegistry Return Card of registered letter No. 119attached to the records of Registration Case No.16347 on page 151. (See minutes of October 6, 1955,page 153 of the Records of Registration Case No.16347, G.L.R.O. Records No. 524 35.

(10) On December 20, 1955, the Court rendered itsdecision in said Reg. Case 16347, Record 52435making the following adjudication ...

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Copy of this Decision were (sic) sent by registeredmail to Atty. Jose M. Garcia, counsel for PraxedesMoya who received it on January 27, 1956 asevidenced by Registry Return Card of Letter No. 39attached to the Record of Registration Case No.16347, on page 187,

(12) Praxedes Moya, herself, was also notified of thisdecision, furnished to her by registered letter whichshe received on January 30, 1956 as evidenced byRegistry Return Card of Registered Letter No. 138,attached to the record of this registration Case 16347,

on page 179. " (Record on Appeal pp, 55-56)

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As successor-in-interest, the petitioner did not onlysucceed to the rights and interests of herpredecessor-in-interest but she was also bound torecognize the liens and/or encumbrances attached tothe subject parcels of land which by law areconsidered to be valid though not inscribed in thetorrens title of that land. The petitioner cannot invokeher relationship with her predecessor when it is to heradvantage and yet disclaim the effects of saidrelationship on exactly the same subject matter when

it is to her disadvantage. This is the principle which

the Court of Appeals took into consideration when itruled that the negligence of petitioner's predecessor-in-interest was binding upon the petitioner herselfnotwithstanding her non- substitution as party to thesubject land registration proceedings.

WHEREFORE. the decision appealed from is herebyaffirmed. Costs against the petitioner.

SO ORDERED.

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G.R. No. L-22331 June 6, 1967

IN RE: PETITION FOR CONSOLIDATION OF TITLEIN THE VENDEES OF A HOUSE AND THE RIGHTSTO A LOT. MARIA BAUTISTA VDA. DE REYES,ET AL., vendees-petitioners-appellees. RODOLFOLANUZA, vendor, vs. MARTIN DE LEON,intervenor-appellant.

Erasmo R. Cruz and C. R. Pascual for intervenor-

appellant.Augusto J. Salas for vendees-petitioners-appellees.

REGALA, J. :

Rodolfo Lanuza and his wife Belen were the ownersof a two-story house built on a lot of the Maria GuizonSubdivision in Tondo, Manila, which the spousesleased from the Consolidated Asiatic Co. On January12, 1961, Lanuza executed a document entitled"Deed of Sale with Right to Repurchase" whereby heconveyed to Maria Bautista Vda. de Reyes and

Aurelia R. Navarro the house, together with theleasehold rights to the lot, a television set and a

refrigerator in consideration of the sum of P3,000. Thedeed reads:

DEED OF SALE WITH RIGHT TO REPURCHASEKNOW ALL MEN BY THESE PRESENTS:

That I, RODOLFO LANUZA, Filipino, of legal age,married to Belen Geronimo, and residing at 783-DInterior 14 Maria Guizon, Gagalangin, Tondo, Manila,hereby declare that I am the true and absolute ownerof a new two storey house of strong materials,constructed on a rented lot Lot No. 12 of the MariaGuizon Subdivision, owned by the Consolidated

Asiatic Co. as evidenced by the attached Receipt

No. 292, and the plan of the subdivision, owned bysaid company.

That for and in consideration of the sum of THREETHOUSAND PESOS (P3,000.00) which I havereceived this day from Mrs. Maria Bautista Vda. deReyes, Filipino, of legal age, widow; and AureliaReyes, married to Jose S. Navarro, Filipinos, of legalages, and residing at 1112 Antipolo St., Tondo,Manila, I hereby SELL, CEDE, TRANSFER, ANDCONVEY unto said Maria Bautista Vda. de Reyes,her heirs, succesors, administrators and assigns saidhouse, including my right to the lot on which it wasconstructed, and also my television, and frigidaire"Kelvinator" of nine cubic feet in size, under the

following conditions:

I hereby reserve for myself, my heirs, successors,administrators, and assigns the right to repurchasethe above mentioned properties for the same amountof P3,000.00, without interest, within the stipulatedperiod of three (3) months from the date hereof. If Ifail to pay said amount of P3,000.00, within thestipulated period of three months, my right torepurchase the said properties shall be forfeited and

the ownership thereto shall automatically pass to Mrs.Maria Bautista Vda. de Reyes, her heirs, successors,administrators, and assigns, without any Courtintervention, and they can take possession of thesame.1wph1.t

IN WITNESS WHEREOF, we have signed thiscontract in the City of Manila, this 12th day ofJanuary, 1961.

s/t RODOLFO LANUZAVendor

s/t MARIA BAUTISTA VDA. DE REYESVendee

s/t AURELIA REYESVendee

WITH MY MARITAL CONSENT:s/t JOSE S. NAVARRO

When the original period of redemption expired, theparties extended it to July 12, 1961 by an annotationto this effect on the left margin of the instrument.Lanuza's wife, who did not sign the deed, this timesigned her name below the annotation.

It appears that after the execution of this instrument,Lanuza and his wife mortgaged the same house infavor of Martin de Leon to secure the payment ofP2,720 within one year. This mortgage was executedon October 4, 1961 and recorded in the Office of theRegister of Deeds of Manila on November 8, 1961under the provisions of Act No. 3344.

As the Lanuzas failed to pay their obliga tion, De Leonfiled in the sheriff's office on October 5, 1962 apetition for the extra-judicial foreclosure of themortgage. On the other hand, Reyes and Navarrofollowed suit by filing in the Court of First Instance ofManila a petition for the consolidation of ownership ofthe house on the ground that the period of redemptionexpired on July 12, 1961 without the vendeesexercising their right of repurchase. The petition forconsolidation of ownership was filed on October 19.On October 23, the house was sold to De Leon as theonly bidder at the sheriffs sale. De Leon immediatelytook possession of the house, secured a discharge ofthe mortgage on the house in favor of a rural bank bypaying P2,000 and, on October 29, intervened incourt and asked for the dismissal of the petition filed

by Reyes and Navarro on the ground that theunrecorded pacto de retro sale could not affect hisrights as a third party.

The parties1

thereafter entered into a stipulation offacts on which this opinion is mainly based andsubmitted the case for decision. In confirming theownership of Reyes and Navarro in the house and theleasehold right to the lot, the court said:

It is true that the original deed of sale with pacto deretro, dated January 12, 1961, was not signed byBelen Geronimo-Lanuza, wife of the vendor a retro,Rodolfo Lanuza, at the time of its execution. Itappears, however, that on the occasion of theextension of the period for repurchase to July 12,1961, Belen Geronimo-Lanuza signed giving herapproval and conformity. This act, in effect,constitutes ratification or confirmation of the contract(Annex "A" Stipulation) by Belen Geronimo-Lanuza,which ratification validated the act of Rodolfo Lanuzafrom the moment of the execution of the said contract.In short, such ratification had the effect of purging thecontract (Annex "A" Stipulation) of any defect which itmight have had from the moment of its execution.

(Article 1396, New Civil Code of the Philippines; TangAh Chan and Kwong Koon vs. Gonzales, 52 Phil.180)

Again, it is to be noted that while it is true that theoriginal contract of sale with right to repurchase infavor of the petitioners (Annex "A" Stipulation) wasnot signed by Belen Geronimo-Lanuza, such failure tosign, to the mind of the Court, made the contractmerely voidable, if at all, and, therefore, susceptible ofratification. Hence, the subsequent ratification of thesaid contract by Belen Geronimo-Lanuza validatedthe said contract even before the property in questionwas mortgaged in favor of the intervenor.

It is also contended by the intervenor that the contractof sale with right to repurchase should be interpretedas a mere equitable mortgage. Consequently, it isargued that the same cannot form the basis for a

judicial petition for consolidation of title over theproperty in litigation. This argument is based on thefact that the vendors a retro continued in possessionof the property after the execution of the deed of salewithpacto de retro. The mere fact, however, that thevendors a retro continued in the possession of theproperty in question cannot justify an outrightdeclaration that the sale should be construed as anequitable mortgage and not a sale with right torepurchase. The terms of the deed of sale with right to

repurchase (Annex "A" Stipulation) relied upon by the

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petitioners must be considered as merely an equitablemortgage for the reason that after the expiration of theperiod of repurchase of three months from January12, 1961.

Article 1602 of the New Civil Code provides:

"ART. 1602. The contract shall be presumed to be inequitable mortgage, in any of the following cases;

x x x x x x x x x

"(3) When upon or after the expiration of the right torepurchase another instrument extending the periodof redemption or granting a new period is executed.

x x x x x x x x x

In the present case, it appears, however, that no otherinstrument was executed between the partiesextending the period of redemption. What was donewas simply to annotate on the deed of sale with rightto repurchase (Annex "A" Stipulation) that "the period

to repurchase, extended as requested until July 12,1961." Needless to say, the purchasers a retro, in theexercise of their freedom to make contracts, have thepower to extend the period of repurchase. Suchextension is valid and effective as it is not contrary toany provision of law. (Umale vs. Fernandez, 28 Phil.89, 93)

The deed of sale with right to repurchase (Annex "A"Stipulation) is embodied in a public document.Consequently, the same is sufficient for the purposeof transferring the rights of the vendors a retro overthe property in question in favor of the petitioners. It isto be noted that the deed of sale with right to

repurchase (Annex "A" Stipulation) was executed onJanuary 12, 1961, which was very much ahead inpoint of time to the execution of the real estatemortgage on October 4, 1961, in favor of intervenor(Annex "B" Stipulation). It is obvious, therefore, thatwhen the mortgagors, Rodolfo Lanuza and BelenGeronimo Lanuza, executed the real estate mortgagein favor of the intervenor, they were no longer theabsolute owners of the property since the same hadalready been sold a retro to the petitioners. Thespouses Lanuza, therefore, could no longer constitutea valid mortgage over the property inasmuch as theydid not have any free disposition of the propertymortgaged. (Article 2085, New Civil Code.) For a validmortgage to exist, ownership of the propertymortgaged is an essential requisite. A mortgage

executed by one who is not the owner of the propertymortgaged is without legal existence and theregistration cannot validate. (Philippine National Bankvs. Rocha, 55 Phil. 497).

The intervenor invokes the provisions of article 1544of the New Civil Code for the reason that while thereal estate mortgage in his favor (Annex "B"Stipulation) has been registered with the Register ofDeeds of Manila under the provisions of Act No. 3344

on November 3, 1961, the deed of sale with right torepurchase (Annex "A" Stipulation) however, has notbeen duly registered. Article 1544 of the New CivilCode, however, refers to the sale of the sameproperty to two or more vendees. This provision oflaw, therefore, is not applicable to the present casewhich does not involve sale of the same property totwo or more vendees. Furthermore, the mereregistration of the property mortgaged in favor of theintervenor under Act No. 3344 does not prejudice theinterests of the petitioners who have a better rightover the property in question under the old principle offirst in time, better in right. (Gallardo vs. Gallardo,C.B., 46 O.G. 5568)

De Leon appealed directly to this Court, contending(1) that the sale in question is not only voidable butvoid ab initio for having been made by Lanuza withoutthe consent of his wife; (2) that the pacto de retro saleis in reality an equitable mortgage and therefore cannot be the basis of a petition for consolidation ofownership; and (3) that at any rate the sale, beingunrecorded, cannot affect third parties.

We are in accord with the trial court's ruling that aconveyance of real property of the conjugalpartnership made by the husband without the consentof his wife is merely voidable. This is clear from article173 of the Civil Code which gives the wife ten yearswithin which to bring an action for annulment. As suchit can be ratified as Lanuza's wife in effect did in thiscase when she gave her conformity to the extensionof the period of redemption by signing the annotationon the margin of the deed. We may add that actionsfor the annulment of voidable contracts can bebrought only by those who are bound under it, eitherprincipally or subsidiarily (art. 1397), so that if therewas anyone who could have questioned the sale onthis ground it was Lanuza's wife alone.

We also agree with the lower court that between anunrecorded sale of a prior date and a recordedmortgage of a later date the former is preferred to thelatter for the reason that if the original owner had

parted with his ownership of the thing sold then he no

longer had the ownership and free disposal of thatthing so as to be able to mortgage it again.Registration of the mortgage under Act No. 3344would, in such case, be of no moment since it isunderstood to be without prejudice to the better rightof third parties.

2Nor would it avail the mortgagee any

to assert that he is in actual possession of theproperty for the execution of the conveyance in apublic instrument earlier was equivalent to thedelivery of the thing sold to the vendee.

3

But there is one aspect of this case which leads us toa different conclusion. It is a point which neither theparties nor the trial court appear to have sufficientlyconsidered. We refer to the nature of the so-called"Deed of Sale with Right to Repurchase" and theclaim that it is in reality an equitable mortgage. WhileDe Leon raised the question below and again in thisCourt in his second assignment of error, he has notdemonstrated his point; neither has he pursued thelogical implication of his argument beyond stating thata petition for consolidation of ownership is aninappropriate remedy to enforce a mortgage.

De Leon based his claim that the pacto de retro sale

is actually an equitable mortgage on the fact that, first,the supposed vendors (the Lanuzas) remained inpossession of the thing sold and, second, when thethree-month period of redemption expired the partiesextended it. These are circumstances which indeedindicate an equitable mortgage.

4But their relevance

emerges only when they are seen in the perspectiveof other circumstances which indubitably show thatwhat was intended was a mortgage and not asale.These circumstances are:

1. The gross inadequacy of the price. In thediscussion in the briefs of the parties as well as in thedecision of the trial court, the fact has not beenmentioned that for the price of P3,000, the supposedvendors "sold" not only their house, which theydescribed as new and as being made of strongmaterials and which alone had an assessed value ofP4,000, but also their leasehold right television setand refrigerator, "Kelvinator of nine cubic feet in size."indeed, the petition for consolidation of ownership islimited to the house and the leasehold right, while thestipulation of facts of the parties merely referred to theobject of the sale as "the property in question." Thefailure to highlight this point, that is, the grossinadequacy of the price paid, accounts for the error indetermining the true agreement of the parties to thedeed.

2. The non-transmission of ownership to the vendees .

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The Lanuzas, the supposed vendors did not reallytransfer their ownership of the properties in questionto Reyes and Navarro. What was agreed was thatownership of the things supposedly sold would vest inthe vendees only if the vendors failed to pay P3,000.In fact the emphasis is on the vendors payment of theamount rather than on the redemption of the thingssupposedly sold. Thus, the deed recites that

If I (Lanuza) fail to pay said amount of P3,000.00

within the stipulated period of three months, my rightto repurchase the said properties shall be forfeitedand the ownership thereto automatically pass to Mrs.Maria Bautista Vda. de Reyes . . . without any Courtintervention and they can take possession of thesame.

This stipulation is contrary to the nature of a truepacto de retro sale under which a vendee acquiresownership of the thing sold immediately uponexecution of the sale, subject only to the vendor'sright of redemption.

5Indeed, what the parties

established by this stipulation is an odious pactumcommissorium which enables the mortgages toacquire ownership of the mortgaged properties

without need of foreclosure proceedings. Needless tosay, such a stipulation is a nullity, being contrary tothe provisions of article 2088 of the Civil Code.

6Its

insertion in the contract of the parties is an avowal ofan intention to mortgage rather than to sell.

7

3. The delay in the filing of the petition forconsolidation. Still another point obviously overlookedin the consideration of this case is the fact that theperiod of redemption expired on July 12, 1961 and yetthis action was not brought until October 19, 1962 andonly after De Leon had asked on October 5, 1962 forthe extra-judicial for closure of his mortgage. All thewhile, the Lanuzas remained in possession of theproperties they were supposed to have sold and theyremained in possession even long after they had losttheir right of redemption.

Under these circumstances we cannot but concludethat the deed in question is in reality a mortgage. Thisconclusion is of far-reaching consequence because itmeans not only that this action for consolidation ofownership is improper, as De Leon claims, but, whatis more that between the unrecorded deed of Reyesand Navarro which we hold to be an equitablemortgage, and the registered mortgage of De Leon,the latter must be preferred. Preference of mortgagecredits is determined by the priority of registration ofthe mortgages,

8following the maxim "Prior tempore

potior jure" (He who is first in time is preferred in

right.)9

Under article 2125 of the Civil Code, theequitable mortgage, while valid between Reyes andNavarro, on the one hand, and the Lanuzas, on theother, as the immediate parties thereto, cannot prevailover the registered mortgage of De Leon.

Wherefore, the decision appealed from is reversed,hence, the petition for consolidation is dismissed.Costs against Reyes and Navarro.

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G.R. Nos. L-43459 and 43460 August 11,1937

EL HOGAR FILIPINO, Mutual Building and LoanAssociation, petitioner-appellant, vs. THEPHILIPPINE NATIONAL BANK, oppositor-appellee.

DeWitt, Perkins, Brady and Ponce Enrile forappellant. Roman J. Lacson for appellee.AVANCEA, C.J.:

On November 5, 1949, Serafin Novella, MercedesNovella, Cecilia Magalona and Robustiano Magalonaconstituted a first mortgage on lots Nos. 194, 158 and14 of the cadastre of Victorias, Occidental Negros,and on lots Nos. 700, 817 and 706 of the cadastre ofSaravia, Occidental Negros, to secure the payment ofthe sum of P28,000, with interest thereon at 9 percent per annum, representing their indebtedness to ElHogar Filipino, Mutual Building and Loan Association.This mortgage was duly registered and noted in thecorresponding certificates of title. The deed ofmortgage contains the following clause:

TENTH. The borrowers hereby give and confer uponthe eventual manager of the Association sufficientand irrevocable power so that, in case the debthereby acknowledge should become due by reason ofthe nonfulfillment by the borrower of any of theobligations stated in the second, fourth, fifth, eleventh,twelfth, thirteen, sixteenth, seventeenth, and twenty-first clauses of this instrument, upon resolution of theboard of directors declaring that the Association haschosen to make use of its right to consider theborrower's debt due, and upon publication of noticesin a newspaper of general circulation in this city oncea week for three (3) consecutive weeks, he mayproceed with the extrajudicial sale at public auction ofthe mortgaged property, before the notary orauctioneer designated by the board of directors, theeventual manager of the Association being likewisevested with irrevocable power, as agent of theborrower, to execute the corresponding deed of salein favor of the highest bidder at the auction. Provided,however, That said instrument of sale shall not beexecuted until after the expiration of thirty (30) daysfrom the dated of the auction sale. And provided,further, That if within said period of thirty (30) daysfrom the date of the auction sale, the borrower shouldpay to the Association the full amount of hisindebtedness on that date, plus the accrued interestthereon and the expenses occasioned by the auctionsale, minus the withdrawal value of his shares, the

auction sale shall be of no effect and therepresentatives of the Association shall execute thecorresponding instrument of cancellation of themortgage constituted hereby, the expenses for theexecution of said instrument of cancellation being forthe account of the borrower.

Subsequently, on June 6, 1930, Serafin Novella,constituted a second mortgage on his 3/4 share ofsaid lots in favor of the Philippine National Bank. El

Hogar Filipino consented to the constitution of thesecond mortgage in favor of the Philippine NationalBank on condition that it be considered subordinate tothe first mortgage constituted in favor of the former.

The Novellas and Magalonas having violated thecontract, El Hogar Filipino declared due, as to them,and proceeded with the auction sale of the mortgagedlots strictly in accordance with the conditions set forthin the above-quoted tenth clause of the mortgagedeed. El Hogar Filipino having been the highestbidder at said sale, the lots sold were adjudicated to itfor the amount of its credit of P39,063.71.

Before the auction sale of the lots in question wascarried out, the Philippine National Bank was notifiedthereof. After the sale had been made, it was likewisenotified for the purposes of its right of repurchase.The Philippine National Bank, however, never madeuse of its right of repurchased to this date.

Thirty days after the auction sale had been made, thecorresponding deed of sale was issued in favor of ElHogar Filipino. When said document was presentedto the office of the register of deeds for thecancellation of the titles to said lots and the issuanceof new certificates in favor of El Hogar Filipino, thePhilippine National Bank opposed, alleging that,under the law, it had one year within which to redeem

the lots. Notwithstanding said opposition, thedocuments was registered with a notation of themortgage in favor of the Philippine National Bank,which notation was agreed to by El Hogar Filipinoprovided it was made to appear that it was merelytaken from the original certificate of the title.

El Hogar Filipino brought these two actions in theCourt of First Instance of Occidental Negros to havethe court declare the mortgage lien in favor of thePhilippine National Bank extinguished and order theregister of deeds to cancel the annotation of saidmortgage in favor of the Philippine National Bank onthe transfer certificates of title issued in favor of ElHogar Filipino.

The court, after due trial, rendered judgment denyingthe petition of El Hogar Filipino and from said

judgment an appeal was taken to this court.

By virtue of the mortgage constituted in favor of the ElHogar Filipino, and the credit thereof having becomedemandable, said mortgaged lots in order to apply theproceeds to the payment of its credit. Such is thelegal effect of the mortgage. The Philippine NationalBank, by reason of the second mortgage constituted

in its favor which was accepted by it as subordinate tothe first mortgage in favor of El Hogar Filipino, cannotoppose such effect. The above-quoted tenth clause ofthe contract being valid (El Hogar Filipino vs.Paredes, 45 Phil., 1780, the validity of the sale madestrictly in accordance therewith cannot be questioned.The sale in debtors and said lots should thereafter beconsidered extinguished in so far as they secured thepayment of the credit of the Philippine National Bank.Therefore, the security in favor of said bank, assecond creditor, was in fact extinguished thereby.

Aside from the right of repurchase, the PhilippineNational Bank's only right under the mortgageconstituted in its favor would be to apply to thepayment of its credit the excess of the proceeds of the

sale after the payment of that of El Hogar Filipino,such being the effect of the subordination of itsmortgage to that of the latter. However, inasmuch asthe credit of El Hogar Filipino has absorbed the entireproceeds of the sale, the mortgage in favor of thebank was in fact extinguished with it because itcannot be enforced by said bank beyond the totalvalue of the mortgaged lots. Consequently, the lotspassed to the repurchaser free from the mortgage infavor of the bank. The bank's claim that the secondmortgage in its favor stands to the prejudice of thepurchaser is untenable, particularly because, as therepurchaser in this case is the first mortgages, wouldpractically be to convert the second mortgage,constituted in favor of the Philippine National Bank,into a first mortgage, and the first mortgage,constituted in favor of El Hogar Filipino, into a secondmortgage. The fact that El Hogar tolerated theannotation of the bank's second mortgage on thetransfer certificates of title in its name is of no avail, itbeing clear that El Hogar's consent to this effect wasnot an admission of the existence of the bank'ssecond mortgage but merely a compromise with thebank's claim that it was still timely for the latter toredeem the lots sold, as shown by the fact that ElHogar consented thereto provided it was made toappear that the annotation was merely taken from thedebtors' certificates of title.

In this instance, Serafin Novella filed a petition to

intervene on April 6, 1937, after the case had already

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been submitted. As said petition was not filed on time,it should be denied (Felismino vs. Gloria, 47 Phil.,967; De Borja vs. Jugo, p. 464, ante).

For the foregoing considerations, the appealedjudgment is reversed, and the second mortgageconstituted on the lots in question in favor of thePhilippine National Bank is ordered cancelled, withoutspecial pronouncement as to costs. So ordered.

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DEVELOPMENT BANK OF THE PHILIPPINES,peti t ioner , vs. COURT OF APPEALSand LYDIA CUBA, respondents.

[G.R. No. 118367. January 5, 1998]

LYDIA P. CUBA, peti t ioner, vs. COURT OF

APPEALS, DEVELOPMENT BANK OFTHE PHILIPPINES and AGRIPINA P.CAPERAL, respondents.

D E C I S I O N

DAVIDE, JR., J.:

These two consolidated cases stemmed froma complaint[1] filed against the Development Bank ofthe Philippines (hereafter DBP) and Agripina Caperalfiled by Lydia Cuba (hereafter CUBA) on 21 May 1985with the Regional Trial Court of Pangasinan, Branch54. The said complaint sought (1) the declaration of

nullity of DBPs appropriation of CUBAs rights, title,and interests over a 44-hectare fishpond located inBolinao, Pangasinan, for being violative of Article2088 of the Civil Code; (2) the annulment of the Deedof Conditional Sale executed in her favor by DBP; (3)the annulment of DBPs sale of the subject fishpondto Caperal; (4) the restoration of her rights, title, andinterests over the fishpond; and (5) the recoveryof damages, attorneys fees, and expenses oflitigation.

After the joinder of issues following the filingby the parties of their respective pleadings, the trialcourt conducted a pre-trial where CUBA and DBPagreed on the following facts, which were embodied

in the pre-trial order:[2]

1. Plaintiff Lydia P. Cuba is agrantee of a Fishpond Lease

Agreement No. 2083 (new)dated May 13, 1974 from theGovernment;

2. Plaintiff Lydia P. Cuba obtainedloans from the DevelopmentBank of the Philippines in theamounts of P109,000.00;P109,000.00; and P98,700.00under the terms stated in thePromissory Notes dated

September 6, 1974; August

11, 1975; and April 4, 1977;

3. As security for said loans, plaintiffLydia P. Cuba executed twoDeeds of Assignment of herLeasehold Rights;

4. Plaintiff failed to pay her loan onthe scheduled dates thereof inaccordance with the terms ofthe Promissory Notes;

5. Without foreclosure proceedings,whether judicial or extra-

judicial, defendant DBPappropriated the LeaseholdRights of plaintiff Lydia Cubaover the fishpond in question;

6. After defendant DBP hasappropriated the LeaseholdRights of plaintiff Lydia Cubaover the fishpond inquestion, defendant DBP, inturn, executed a Deed ofConditional Sale of the

Leasehold Rights in favor ofplaintiff Lydia Cuba over thesame fishpond in question;

7. In the negotiation for repurchase,plaintiff Lydia Cubaaddressed two letters to theManager DBP, Dagupan Citydated November 6, 1979 andDecember 20, 1979. DBPthereafter accepted the offerto repurchase in a letteraddressed to plaintiff datedFebruary 1, 1982;

8. After the Deed of ConditionalSale was executed in favorof plaintiff Lydia Cuba, a newFishpond Lease AgreementNo. 2083-A dated March 24,1980 was issued by theMinistry of Agriculture andFood in favor of plaintiffLydia Cuba only, excludingher husband;

9. Plaintiff Lydia Cuba failed to paythe amortizations stipulatedin the Deed of ConditionalSale;

10. After plaintiff Lydia Cuba failed topay the amortization asstated in Deed of ConditionalSale, she entered with theDBP a temporaryarrangement whereby inconsideration for thedeferment of the NotarialRescission of Deed ofConditional Sale, plaintiffLydia Cuba promised to

make certain payments asstated in temporary

Arrangement da ted February23, 1982;

11. Defendant DBP thereafter sent aNotice of Rescission thruNotarial Act dated March 13,1984, and which wasreceived by plaintiff LydiaCuba;

12. After the Notice of Rescission,defendant DBP tookpossession of the Leasehold

Rights of the fishpond inquestion;

13. That after defendant DBP tookpossession of the LeaseholdRights over the fishpond inquestion, DBP advertised inthe SUNDAY PUNCH thepublic bidding dated June24, 1984, to dispose of theproperty;

14. That the DBP thereafter executeda Deed of Conditional Sale infavor of defendant Agripina

Caperal on August 16, 1984;

15. Thereafter, defendant Caperalwas awarded FishpondLease Agreement No. 2083-

A on December 28, 1984 bythe Ministry of Agricultureand Food.

Defendant Caperal admitted only the factsstated in paragraphs 14 and 15 of the pre-trial order.[3]

Trial was thereafter had on other matters.

The principal issue presented was whether

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the act of DBP in appropriating to itself CUBAsleasehold rights over the fishpond in question withoutforeclosure proceedings was contrary to Article 2088of the Civil Code and, therefore, invalid. CUBAinsisted on an affirmative resolution. DBP stressedthat it merely exercised its contractual right under the

Assignments of Leasehold Rights, which was not acontract of mortgage. Defendant Caperal sided withDBP.

The trial court resolved the issue in favor of

CUBA by declaring that DBPs taking possession andownership of the property without foreclosure wasplainly violative of Article 2088 of the Civil Code whichprovides as follows:

ART. 2088. The creditor cannot appropriate thethings given by way of pledge or mortgage, or disposeof them. Any stipulation to the contrary is null andvoid.

It disagreed with DBPs stand that the Assignments ofLeasehold Rights were not contracts of mortgagebecause (1) they were given as security for loans, (2)although the fishpond land in question is still a public

land, CUBAs leasehold rights and interest thereonare alienable rights which can be the proper subject ofa mortgage; and (3) the intention of the contractingparties to treat the Assignment of Leasehold Rightsas a mortgage was obvious and unmistakable; hence,upon CUBAs default, DBPs only right was toforeclose the Assignment in accordance with law.

The trial court also declared invalid conditionno. 12 of the Assignment of Leasehold Rights forbeing a clear case of pactum commissoriumexpressly prohibited and declared null and void by

Article 2088 of the Civil Code. It then concluded thatsince DBP never acquired lawful ownership ofCUBAs leasehold rights, all acts of ownership andpossession by the said bank were void. Accordingly,the Deed of Conditional Sale in favor of CUBA, thenotarial rescission of such sale, and the Deed ofConditional Sale in favor of defendant Caperal, aswell as the Assignment of Leasehold Rights executedby Caperal in favor of DBP, were also void andineffective.

As to damages, the trial court found ampleevidence on record that in 1984 the representativesof DBP ejected CUBA and her caretakers not onlyfrom the fishpond area but also from the adjoining bighouse; and that when CUBAs son and caretakerwent there on 15 September 1985, they found thesaid house unoccupied and destroyed and CUBAspersonal belongings, machineries, equipment, tools,

and other articles used in fishpond operation whichwere kept in the house were missing. The missingitems were valued at about P550,000. It further foundthat when CUBA and her men were ejected by DBPfor the first time in 1979, CUBA had stocked thefishpond with 250,000 pieces of bangus fish (milkfish),all of which died because the DBP representativesprevented CUBAs men from feeding the fish. At theconservative price of P3.00 per fish, the gross valuewould 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 setthe aggregate of the actual damages sustained byCUBA at P1,067,500.

The trial court further found that DBP wasguilty of gross bad faith in falsely representing to theBureau of Fisheries that it had foreclosed itsmortgage on CUBAs leasehold rights. Suchrepresentation induced the said Bureau to terminateCUBAs leasehold rights and to approve the Deed ofConditional Sale in favor of CUBA. And consideringthat by reason of her unlawful ejectment by DBP,CUBA suffered moral shock, degradation, socialhumiliation, and serious anxieties for which shebecame sick and had to be hospitalized the trial court

found her entitled to moral and exemplarydamages. The trial court also held that CUBA wasentitled to P100,000 attorneys fees in view of theconsiderable expenses she incurred for lawyers feesand in view of the finding that she was entitled toexemplary damages.

In its decision of 31 January 1990, [4] the trialcourt disposed as follows:

WHEREFORE, judgment is hereby rendered in favorof plaintiff:

1. DECLARING null and void and withoutany legal effect the act of defendantDevelopment Bank of the Philippinesin appropriating for its own interest,without any judicial or extra-judicialforeclosure, plaintiffs leasehold rightsand interest over the fishpond land inquestion under her Fishpond Lease

Agreement No. 2083 (new);

2. DECLARING the Deed of Conditional Saledated February 21, 1980 by andbetween the defendant DevelopmentBank of the Philippines and plaintiff(Exh. E and Exh. 1) and the acts ofnotarial rescission of the Development

Bank of the Philippines relative to saidsale (Exhs. 16 and 26) as void andineffective;

3. DECLARING the Deed of ConditionalSale dated August 16, 1984 by andbetween the Development Bank of thePhilippines and defendant AgripinaCaperal (Exh. F and Exh. 21), theFishpond Lease Agreement No. 2083-

A dated December 28, 1984 ofdefendant Agripina Caperal (Exh. 23)and the Assignment of LeaseholdRights dated February 12, 1985executed by defendant AgripinaCaperal in favor of the defendantDevelopment Bank of the Philippines(Exh. 24) as void ab initio;

4. ORDERING defendant Development Bankof the Philippines and defendant

Agripina Caperal, jointly and severally,to restore to plaintiff the lattersleasehold rights and interests and rightof possession over the fishpond landin question, without prejudice to theright of defendant Development Bankof the Philippines to foreclose thesecurities given by plaintiff;

5. ORDERING defendant Development Bankof the Philippines to pay to plaintiff thefollowing 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 HUNDREDTHOUSAND (P100,000.00)PESOS as moral damages;

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

d) And the sum of ONE HUNDREDTHOUSAND (P100,000.00)PESOS, as and for attorneys

fees;

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6. And ORDERING defendant DevelopmentBank of the Philippines to reimburseand pay to defendant AgripinaCaperal the sum of ONE MILLIONFIVE HUNDRED THIRTY-TWOTHOUSAND SIX HUNDRED TENPESOS AND SEVENTY-FIVECENTAVOS (P1,532,610.75)representing the amounts paid bydefendant Agripina Caperal todefendant Development Bank of the

Philippines under their Deed ofConditional Sale.

CUBA and DBP interposed separate appealsfrom the decision to the Court of Appeals. The formersought an increase in the amount of damages, whilethe latter questioned the findings of fact and law of thelower court.

In its decision [5] of 25 May 1994, the Court ofAppeals ruled that (1) the trial court erred in declaringthat the deed of assignment was null and void andthat defendant Caperal could not validly acquire theleasehold rights from DBP; (2) contrary to the claim of

DBP, the assignment was not a cession under Article1255 of the Civil Code because DBP appeared to bethe sole creditor to CUBA - cession presupposesplurality of debts and creditors; (3) the deeds ofassignment represented the voluntary act of CUBA inassigning her property rights in payment of her debts,which amounted to a novation of the promissory notesexecuted by CUBA in favor of DBP; (4) CUBA wasestopped from questioning the assignment of theleasehold rights, since she agreed to repurchase thesaid rights under a deed of conditional sale; and (5)condition no. 12 of the deed of assignment was anexpress authority from CUBA for DBP to sell whateverright she had over the fishpond. It also ruled thatCUBA was not entitled to loss of profits for lack

of evidence, but agreed with the trial court as to theactual damages of P1,067,500. It, however, deletedthe amount of exemplary damages and reduced theaward of moral damages from P100,000 to P50,000and attorneys fees, from P100,000 to P50,000.

The Court of Appeals thus declared as validthe following: (1) the act of DBP in appropriatingCubas leasehold rights and interest under FishpondLease Agreement No. 2083; (2) the deeds ofassignment executed by Cuba in favor of DBP; (3) thedeed of conditional sale between CUBA and DBP;and (4) the deed of conditional sale between DBP andCaperal, the Fishpond Lease Agreement in favor ofCaperal, and the assignment of leaseholdrights executed by Caperal in favor of DBP. It then

ordered DBP to turn over possession of the propertyto Caperal as lawful holder of the leasehold rights andto pay CUBA the following amounts: (a) P1,067,500as actual damages; P50,000 as moral damages; andP50,000 as attorneys fees.

Since their motions for reconsideration weredenied,[6] DBP and CUBA filed separate petitions forreview.

In its petition (G.R. No. 118342), DBP assails

the award of actual and moral damages andattorneys fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No.118367), CUBA contends that the Court of Appealserred (1) in not holding that the questioned deed ofassignment was a pactum commissorium contrary to

Article 2088 o f the Civil Code; (b) in holding that thedeed of assignment effected a novation of thepromissory notes; (c) in holding that CUBA wasestopped from questioning the validity of the deed ofassignment when she agreed to repurchase herleasehold rights under a deed of conditional sale; and(d) in reducing the amounts of moral damages andattorneys fees, in deleting the award of exemplary

damages, and in not increasing the amount ofdamages.

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

It is undisputed that CUBA obtained from DBPthree separate loans totalling P335,000, each ofwhich was covered by a promissory note. In all ofthese notes, there was a provision that: In the eventof foreclosure of the mortgage securing this notes,I/We further bind myself/ourselves, jointly andseverally, to pay the deficiency, if any. [7]

Simultaneous with the execution of the notes

was the execution of Assignments of LeaseholdRights [8] where CUBA assigned her leasehold rightsand interest on a 44-hectare fishpond, together withthe improvements thereon. As pointed out by CUBA,the deeds of assignment constantly referred to theassignor (CUBA) as borrower; the assigned rights,as mortgaged properties; and the instrument itself, asmortgage contract. Moreover, under condition no. 22of the deed, it was provided that failure to complywith the terms and condition of any of the loans shallcause all other loans to become due and demandableand all mortgages shall be foreclosed. And,condition no. 33 provided that if foreclosure isactually accomplished, the usual 10% attorneys feesand 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 partiesadmitted that the assignment was by way of securityfor 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 Peoples Bank & Trust Co. vs. Odom,[9]this Court had the occasion to rule that an assignmentto guarantee an obligation is in effect a mortgage.

We find no merit in DBPs contention that theassignment novated the promissory notes in that theobligation to pay a sum of money the loans (under thepromissory notes) was substituted by the assignmentof the rights over the fishpond (under the deed ofassignment). As correctly pointed out by CUBA, thesaid assignment merely complemented orsupplemented the notes; both could standtogether. The former was only an accessory to thelatter. Contrary to DBPs submission, the obligation topay a sum of money remained, and the assignment

merely served as security for the loans covered by thepromissory notes. Significantly, both the deeds ofassignment and the promissory notes were executedon the same dates the loans were granted. Also, thelast paragraph of the assignment stated: Theassignor further reiterates and states all terms,covenants, and conditions stipulated in thepromissory note or notes covering the proceeds ofthis loan, making said promissory note or notes, to allintent and purposes, an integral part hereof.

Neither did the assignment amount topayment by cession under Article 1255 of the CivilCode for the plain and simple reason that there wasonly one creditor, the DBP. Article 1255contemplates the existence of two or more creditorsand involves the assignment of all the debtorsproperty.

Nor did the assignment constitute dation inpayment under Article 1245 of the civil Code, whichreads: Dation in payment, whereby property isalienated to the creditor in satisfaction of a debt inmoney, shall be governed by the law on sales. Itbears stressing that the assignment, being in itsessence a mortgage, was but a security and not asatisfaction of indebtedness.[10]

We do not, however, buy CUBAs argumentthat condition no. 12 of the deed of assignmentconstituted pactum commissorium. Said condition

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reads:

12. That effective upon the breach of any condition ofthis assignment, the Assignor hereby appoints the

Assignee his Attorney-in-fact with full power andauthority to take actual possession of the propertyabove-described, together with all improvementsthereon, subject to the approval of the Secretary of

Agriculture and Natural Resources, to lease the sameor any portion thereof and collect rentals, to makerepairs or improvements thereon and pay the same,

to sell or otherwise dispose of whatever rights theAssignor has or might have over said property and/orits improvements and perform any other act which the

Assignee may deem convenient to protect itsinterest. All expenses advanced by the Assignee inconnection with purpose above indicated which shallbear the same rate of interest aforementioned arealso guaranteed by this Assignment. Any amountreceived from rents, administration, sale or disposal ofsaid property may be supplied by the Assignee to thepayment of repairs, improvements, taxes,assessments and other incidental expenses andobligations and the balance, if any, to the payment ofinterest and then on the capital of the indebtednesssecured hereby. 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 the same to theAssignee upon demand, together with all interestthereon until fully paid. The power herein grantedshall not be revoked as long as the Assignor isindebted to the Assignee and all acts that may beexecuted by the Assignee by virtue of said power arehereby ratified.

The elements ofpactum commissorium areas follows: (1) there should be a property mortgagedby way of security for the payment of the principalobligation, and (2) there should be a stipulation forautomatic appropriation by the creditor of the thingmortgaged in case of non-payment of the principalobligation within the stipulated period.[11]

Condition no. 12 did not provide that theownership over the leasehold rights wouldautomatically pass to DBP upon CUBAs failure to paythe loan on time. It merely provided for theappointment of DBP as attorney-in-fact with authority,among other things, to sell or otherwise dispose of thesaid real rights, in case of default by CUBA, and toapply the proceeds to the payment of the loan. Thisprovision is a standard condition in mortgagecontracts and is in conformity with Article 2087 of theCivil Code, which authorizes the mortgagee toforeclose the mortgage and alienate the mortgaged

property for the payment of the principal obligation.

DBP, however, exceeded the authority vestedby condition no. 12 of the deed of assignment. Asadmitted by it during the pre-trial, it had [w]ithoutforeclosure proceedings, whether judicial orextrajudicial, appropriated the [l]easehold [r]ights ofplaintiff Lydia Cuba over the fishpond in question. Itscontention that it limited itself to mere administrationby posting caretakers is further belied by the deed ofconditional sale it executed in favor of CUBA. The

deed stated:

WHEREAS, the Vendor [DBP] by virtue of a deed ofassignment executed in its favor by the hereinvendees [Cuba spouses] the former acquired all therights and interest of the latter over the above-described property;

The title to the real estate property [sic] and allimprovements thereon shall remain in the name of theVendor until after the purchase price, advances andinterest shall have been fully paid. (Emphasissupplied).

It is obvious from the above-quotedparagraphs that DBP had appropriated and takenownership of CUBAs leasehold rights merely on thestrength of the deed of assignment.

DBP cannot take refuge in condition no. 12 ofthe deed of assignment to justify its act ofappropriating the leasehold rights. As stated earlier,condition no. 12 did not provide that CUBAs defaultwould operate to vest in DBP ownership of the saidrights. Besides, an assignment to guarantee anobligation, as in the present case, is virtually a

mortgage and not an absolute conveyance of titlewhich confers ownership on the assignee.[12]

At any rate, DBPs act of appropriatingCUBAs leasehold rights was violative of Article 2088of the Civil Code, which forbids a creditor fromappropriating, or disposing of, the thing given assecurity for the payment of a debt.

The fact that CUBA offered and agreed torepurchase her leasehold rights from DBP did notestop her from questioning DBPs act ofappropriation. Estoppel is unavailing in this case. Asheld by this Court in some cases,[13] estoppel cannotgive validity to an act that is prohibited by law or

against public policy. Hence, the appropriation of the

leasehold rights, being contrary to Article 2088 of theCivil Code and to public policy, cannot be deemedvalidated by estoppel.

Instead of taking ownership of the questionedreal rights upon default by CUBA, DBP should haveforeclosed the mortgage, as has been stipulated incondition no. 22 of the deed of assignment. But, asadmitted by DBP, there was no suchforeclosure. Yet, in its letter dated 26 October 1979,addressed to the Minister of Agriculture and Natural

Resources and coursed through the Director of theBureau of Fisheries and Aquatic Resources, DBPdeclared that it had foreclosed the mortgage andenforced the assignment of leasehold rights on March21, 1979 for failure of said spouses [Cuba spouces] topay their loan amortizations.[14] This only goes toshow that DBP was aware of the necessity offoreclosure proceedings.

In view of the false representation of DBP thatit had already foreclosed the mortgage, the Bureau ofFisheries cancelled CUBAs original lease permit,approved the deed of conditional sale, and issued anew permit in favor of CUBA. Said acts which werepredicated on such false representation, as well as

the subsequent acts emanating from DBPsappropriation of the leasehold rights, should thereforebe set aside. To validate these acts would open thefloodgates to circumvention of Article 2088 of the CivilCode.

Even in cases where foreclosure proceedingswere had, this Court had not hesitated to nullify theconsequent auction sale for failure to comply with therequirements laid down by law, such as Act No. 3135,as amended.[15] With more reason that the sale ofproperty given as security for the payment of a debtbe set aside if there was no prior foreclosureproceeding.

Hence, DBP should render an accounting ofthe income derived from the operation of the fishpondin question and apply the said income in accordancewith condition no. 12 of the deed of assignment whichprovided: Any amount received from rents,administration, may be applied to the payment ofrepairs, improvements, taxes, assessment, and otherincidental expenses and obligations and the balance,if any, to the payment of interest and then on thecapital 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

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entitled to an adequate compensation only for suchpecuniary loss suffered by him as he has dulyproved. Such compensation is referred to as actualor compensatory damages.

Actual or compensatory damages cannot bepresumed, but must be proved with reasonabledegree of certainty.[16] A court cannot rely onspeculations, conjectures, or guesswork as to the factand amount of damages, but must depend upon

competent proof that they have been suffered by theinjured party and on the best obtainable evidence ofthe actual amount thereof.[17] It must point outspecific facts which could afford a basis for measuringwhatever compensatory or actual damages areborne.[18]

In the present case, the trial court awarded infavor of CUBA P1,067,500 as actual damagesconsisting of P550,000 which represented the valueof the alleged lost articles of CUBA and P517,500which represented the value of the 230,000 pieces ofbangus allegedly stocked in 1979 when DBP firstejected CUBA from the fishpond and the adjoininghouse. This award was affirmed by the Court of

Appeals.

We find that the alleged loss of personalbelongings and equipment was not proved by clearevidence. Other than the testimony of CUBA and hercaretaker, there was no proof as to the existence ofthose items before DBP took over the fishpond inquestion. As pointed out by DBP, there was notinventory of the alleged lost items before the losswhich is normal in a project which sometimes, if notmost often, is left to the care of otherpersons. Neither was a single receipt or record ofacquisition presented.

Curiously, in her complaint dated 17 May1985, CUBA included losses of property as amongthe damages resulting from DBPs take-over of thefishpond. Yet, it was only in September 1985 whenher son and a caretaker went to the fishpond and theadjoining house that she came to know of the allegedloss of several articles. Such claim for losses ofproperty, having been made before knowledge of thealleged actual loss, was therefore speculative. Thealleged loss could have been a mere afterthought orsubterfuge to justify her claim for actual damages.

With regard to the award of P517,000representing the value of the alleged 230,000 piecesof bangus which died when DBP took possession ofthe fishpond in March 1979, the same was not calledfor. Such loss was not duly proved; besides, the

claim therefor was delayed unreasonably. From 1979until after the filing of her complaint in court in May1985, CUBA did not bring to the attention of DBP thealleged loss. In fact, in her letter dated 24 October1979,[19] she declared:

1. That from February to May 1978, I was thenseriously ill in Manila and within the same period Ineglected the management and supervision of thecultivation and harvest of the produce of the aforesaidfishpond thereby resulting to the irreparable loss in

the produce of the same in the amount of aboutP500,000.00 to my great damage and prejudice dueto fraudulent acts of some of my fishpond workers.

Nowhere in the said letter, which was writtenseven months after DBP took possession of thefishpond, did CUBA intimate that upon DBPs take-over there was a total of 230,000 pieces of bangus,but all of which died because of DBPsrepresentatives prevented her men from feeding thefish.

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

In view, however, of DBPs act ofappropriating CUBAs leasehold rights which wascontrary to law and public policy, as well as its falserepresentation to the then Ministry of Agriculture andNatural Resources that it had foreclosed themortgage, an award of moral damages in the amountof P50,000 is in order conformably with Article2219(10), in relation to Article 21, of the CivilCode. Exemplary or corrective damages in theamount of P25,000 should likewise be awarded byway of example or correction for the public good.[20]There being an award of exemplary damages,attorneys fees are also recoverable.[21]

WHEREFORE, the 25 May 1994 Decision ofthe Court of Appeals in CA-G.R. CV No. 26535 ishereby REVERSED, except as to the award ofP50,000 as moral damages, which is herebysustained. The 31 January 1990 Decision of theRegional Trial Court of Pangasinan, Branch 54, inCivil Case No. A-1574 is MODIFIED setting aside thefinding that condition no. 12 of the deed ofassignment constituted pactum commissorium andthe award of actual damages; and by reducing theamounts of moral damages from P100,000 toP50,000; the exemplary damages, from P50,000 toP25,000; and the attorneys fees, from P100,000 toP20,000. The Development Bank of the Philippines ishereby ordered to render an accounting of the incomederived from the operation of the fishpond in question.

Let this case be REMANDED to the trial courtfor the reception of the income statement of DBP, aswell as the statement of the account of Lydia P. Cuba,and for the determination of each partys financialobligation to one another.

SO ORDERED.

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G.R. No. L-49940 September 25, 1986

GEMMA R. HECHANOVA, accompanied by herhusband, NICANOR HECHANOVA, JR., andPRESCILLA R. MASA, accompanied by herhusband, FRANCISCO MASA, petitioners, vs. HON. MIDPANTAO L. ADIL, PresidingJudge, Branch II, Court of First Instance of Iloilo,THE PROVINCIAL SHERIFF OF ILOILO, and PIOSERVANDO, respondents.

YAP, J. :

Petitioners seek the annulment of various ordersissued by the respondent Presiding Judge of BranchII, Court of First Instance of Iloilo, in Civil Case No.12312 entitled "Pio Servando versus Jose Y.Servando et al." A temporary restraining order wasissued by this Court on May 9, 1979, staying untilfurther orders the execution of the decision renderedby the respondent Judge in said case.

The case under review is for the annulment of a deedof sale dated March 11, 1978, executed by defendantJose Y. Servando in favor of his co-defendants, thepetitioners herein, covering three parcels of landsituated in Iloilo City. Claiming that the said parcels ofland were mortgaged to him in 1970 by the vendor,who is his cousin, to secure a loan of P20,000.00, theplaintiff Pio Servando impugned the validity of thesale as being fraudulent, and prayed that it bedeclared null and void and the transfer certificates oftitle issued to the vendees be cancelled, oralternatively, if the sale is not annulled, to order thedefendant Jose Servando to pay the amount ofP20,000.00, plus interests, and to order defendants topay damages. Attached to the complaint was a copyof the private document evidencing the allegedmortgage (Annex A), which is quoted hereunder:

August 20, 1970

This is to certify that I, Jose Yusay Servando, the soleowner of three parcel of land under Tax DeclarationNo. 28905, 44123 and 31591 at Lot No. 1, 1863-Portion of 1863 & 1860 situated at Sto. Nino St.,

Arevalo, Compania St. & Compania St., Interior Molo ,respectively, have this date mortgaged the saidproperty to my cousin Pio Servando, in the amount ofTWENTY THOUSAND PESOS (P20,000.00),redeemable for a period not exceeding ten (10) years,

the mortgage amount bearing an interest of 10% perannum.

I further certify that in case I fail to redeem the saidproperties within the period stated above, my cousinPio Servando, shall become the sole owner thereof.

(SGD.) JOSE YUSAY SERVANDO

WITNESSES:

(Sgd) Ernesto G. Jeruta

(Sgd) Francisco B. Villanueva

The defendants moved to dismiss the complaint onthe grounds that it did not state a cause of action, thealleged mortgage being invalid and unenforceablesince it was a mere private document and was notrecorded in the Registry of Deeds; and that theplaintiff was not the real party in interest and, as amere mortgagee, had no standing to question thevalidity of the sale. The motion was denied by the

respondent Judge, in its order dated June 20, 1978,"on the ground that this action is actually one forcollection."

On June 23, 1978, defendant Jose Y. Servando died.The defendants filed a Manifestation and Motion,informing the trial court accordingly, and moving forthe dismissal of the complaint pursuant to Section 21of Rule 3 of the Rules of Court, pointing out that theaction was for. recovery of money based on anactionable document to which only the deceaseddefendant was a party. The motion to dismiss wasdenied on July 25, 1978, "it appearing from the face ofthe complaint that the instant action is not purely amoney claim, it being only incidental, the main actionbeing one for annulment and damages."

On August 1, 1978, plaintiff filed a motion to declaredefendants in default, and on the very next day,

August 2, the respondent Judge granted the motionand set the hearing for presentation of plaintiff'sevidence ex-parte on August 24, 1978.

On August 2, 1978, or the same day that the defaultorder was issued, defendants Hechanova and Masafiled their Answers, denying the allegations of thecomplaint and repeating, by way of special andaffirmative defenses, the grounds stated in theirmotions to dismiss.

On August 25, 1978, a judgment by default wasrendered against the defendants, annulling the deedof sale in question and ordering the Register of Deedsof Iloilo to cancel the titles issued to Priscilla Masaand Gemma Hechanova, and to revive the title issuedin the name of Jose Y. Servando and to deliver thesame to the plaintiff.

The defendants took timely steps to appeal thedecision to the Court of Appeals by filing a notice ofappeal, an appeal bond, and a record on appeal.However, the trial court disapproved the record onappeal due to the failure of defendants to comply withits order to eliminate therefrom the answer filed on

August 2, 1978 and accordingly, dismissed theappeal, and on February 2, 1978, issued an ordergranting the writ of execution prayed for by plaintiff.

We find the petition meritorious, and the same ishereby given due course.

It is clear from the records of this case that the plaintiffhas no cause of action. Plaintiff has no standing toquestion the validity of the deed of sale executed bythe deceased defendant Jose Servando in favor of hisco-defendants Hechanova and Masa. No validmortgage has been constituted plaintiff's favor, thealleged deed of mortgage being a mere privatedocument and not registered; moreover, it contains astipulation (pacto comisorio) which is null and voidunder Article 2088 of the Civil Code. Even assumingthat the property was validly mortgaged to the plaintiff,his recourse was to foreclose the mortgage, not toseek annulment of the sale.

WHEREFORE, the decision of the respondent courtdated August 25, 1973 and its Order of February 2,1979 are set aside, and the complaint filed by plaintiffdated February 4, 1978 is hereby dismissed.

SO ORDERED.

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G.R. No. 74073 September 13, 1991

HONESTO ONG, RENATO LLOBRERA, AVELINODE GRACIA, JR., ALFONSO ONG, and SANTIAGOOCAMPO, petitioners, vs. HON.INTERMEDIATEAPPELLATE COURT, HON. RICARDO D. DIAZ, asJudge of the RTC of Manila, Branch XXVII andCONSOLIDATED BANK AND TRUSTCORPORATION (SOLID BANK), respondents.

Joaquin P. Yuseco, Jr. for petitioners.

C.M. De los Reyes & Associates for SOLID BANK

PARAS, J. :

This is a petition for review on certiorari seeking toreverse and set aside: (a) the decision * of theIntermediate Appellate Court dated January 31, 1986in AC-G.R. SP No. 05490 entitled "Honesto Ong, etal. v. Hon. Ricardo D. Diaz, et al." which dismissedthe petition for lack of merit and (b) the resolutiondated March 26, 1986 denying the motion forreconsideration.

The undisputed facts of the case are as follows:

On July 27, 1977, Madrigal Shipping Co., Inc. appliedfor and was granted a loan by the Consolidated Bankand Trust Corporation (Solidbank for short) in theamount of P2,094,000.00 payable on or before July27, 1978 at ten (10%) percent interestper annum asevidenced by Promissory Note No. 57884 (Rollo, p.61).

To secure the fulfillment of the obligations of MadrigalShipping Co., Inc. to the Solidbank, and credit

accommodations which the former may from time totime obtain from the latter both parties executed adocument denominated as "Pledge Agreement" datedDecember 4, 1978 (Rollo, pp. 77-78).

Under the said Pledge Agreement, Madrigal Shipping,Co., Inc. gave additional securities or collaterals in theform of a pledge in favor of the bank, its barge andtugboat particularly described, as follows:

"Tugboat CARBPM" of 27/42 gross tonnage 13.87 nettonnage, one (1) deck, no mast, 13.77 mt. long, 4.32mt. broad, 1.73 mt. steep, with Certificate ofOwnership No. 1283 and Certificate of Registration

No. 6886.

MSC Barge No. 601, of 372.28 gross tonnage, 361.96net tonnage, 120 mt. long, 32 mt. broad, 10 ft. deep,with Certificate of Ownership No. 6213, Certificate No.127-68. (Ibid.)

Madrigal Shipping Co., Inc. failed to pay its obligationto the Solidbank. The creditor bank had to sell thepledged properties. Nevertheless, when th