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Escano vs Ortigas

The main contention raised in this petition is that petitioners are not under obligation toreimburse respondent, a claim that can be easily debunked. The more perplexing question iswhether this obligation to repay is solidary, as contended by respondent and the lower courts, or merely joint as argued by petitioners.

On 28 April 1980, Private Development Corporation of the Philippines (PDCP)[1] entered into aloan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make availableand lend to Falcon the amount of US$320,000.00, for specific purposes and subject to certainterms and conditions.[2] On the same day, three stockholders-officers of Falcon, namely:respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed

an Assumption of Solidary Liability whereby they agreed “to assume in [their] individual capacity,solidary liability with [Falcon] for the due and punctual payment” of the loan contracted by Falconwith PDCP.[3] In the meantime, two separate guaranties were executed to guarantee thepayment of the same loan by other stockholders and officers of Falcon, acting in their personaland individual capacities. One Guaranty[4] was executed by petitioner Salvador Escaño(Escaño), while the other [5] by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio),Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to Escaño, Silos andJoseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey,Inductivo and the heirs of then already deceased George T. Scholey assigned their shares o f stock in Falcon to Escaño, S ilos and Matti.[6] Part of the consideration that induced the sale o f stock was a desire by Ortigas, et al ., to relieve themselves of all liability arising from their previous joint and several undertakings with Falcon, including those re lated to the loan withPDCP. Thus, an Undertaking dated 11 June 1982 was executed by the concernedparties,[7] namely: with Escaño, Silos and Matti identified in the document as “SURETIES,” onone hand, and Ortigas, Inductivo and the Scholeys as “OBLIGORS,” on the other. The

Undertaking reads in part:

3. That whether or not SURETIES are able to immediately cause PDCP and PAIC torelease OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree andundertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP and PAIC under thefollowing terms and conditions:

a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for thepayment of FALCON’s obligations with it, any of [the] OBLIGORS shall immediately informSURETIES thereof so that the latter can timely take appropriate measures;

b. Should suit be impleaded by PDCP and/or PAIC against any and/or a ll of OBLIGORS for collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES thereinfor contribution, indemnity, subrogation or other relief in respect to any o f the claims of PDCPand/or PAIC; and

c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount toPDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)calendar days from such payment;

4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due fromFALCON arising out of, or in connection with, their said guarantees[sic].[8] 

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended byPDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon subsequently defaulted in its payments. After PDCPforeclosed on the chattel mortgage, there remained a subsisting deficiency of P5,031,004.07,which Falcon did not satisfy despite demand.[9] 

On 28 April 1989, in o rder to recover the indebtedness, PDCP filed a complaint for sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escaño, S ilos,Silverio and Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas

filed together with his answer a cross-claim against his co-defendants Falcon, Escaño and Silos,and also manifested his intent to file a third-party complaint against the Scholeys andMatti.[10] The cross-claim lodged against Escaño and Silos was predicated on the 1982Undertaking, wherein they agreed to assume the liabilities of Ortigas with respect to the PDCPloan.

Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come toterms with PDCP was Escaño, who in December of 1993, entered into a compromise agreementwhereby he agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or assigned infavor of Escaño one-third (1/3) of its entire claim in the complaint against all of the other defendants in the case.[11] The compromise agreement was approved by the RTC in aJudgment[12] dated 6 January 1994.

Then on 24 February 1994, Ortigas entered into his own compromise agreement[13] with PDCP,allegedly without the knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to payPDCP P1,300,000.00 as “full satisfaction of the PDCP’s claim against Ortigas,”[14] in exchangefor PDCP’s release of Ortigas from any liability or claim arising from the Falcon loan agreement,

and a renunciation of its claims against Ortigas.

In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed topay P500,000.00 in exchange for PDCP’s waiver of its claims against him.[15] 

In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escaño,Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaintagainst Matti and Silos,[16] while he maintained his cross-claim against Escaño. In 1995, Ortigasfiled a motion for Summary Judgment in his favor aga inst Escaño, Silos and Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escaño, S ilos and Matti to payOrtigas, jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in attorney’sfees.[17] The trial court ratiocinated that none of the third-party defendants disputed the 1982Undertaking, and that “the mere denials of defendants with respect to non-compliance of Ortigasof the terms and conditions of the Undertaking, unaccompanied by any substantial fact whichwould be admissible in evidence at a hearing, are not sufficient to raise genuine issues of fact

necessary to defeat a motion for summary judgment, even if such facts were raised in thepleadings.”[18]  In an Order dated 7 March 1996, the trial court denied the motion for reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28 February 1994.[19] 

From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals.Escaño and Silos appealed jointly while Matti appealed by his lonesome. In aDecision[20] dated 23 January 2002, the Court of Appeals dismissed the appeals and affirmed

the Summary Judgment. The appellate court found that the RTC did not err in rendering thesummary judgment since the three appellants did not effectively deny their execution of the1982 Undertaking. The special def enses that were raised, “payment and excussion,” werecharacterized by the Court of Appeals as “appear[ing] to be merely sham in the light of thepleadings and supporting documents and affidavits.”[21] Thus, it was concluded that there was nogenuine issue that would still require the rigors o f trial, and that the appealed judgment wasdecided on the bases of the undisputed and established facts of the case.

Hence, the present petition for review filed by Escaño and Silos.[22] Two main issues are raised.First, petitioners dispute that they are liable to Ortigas on the bas is of the 1982 Undertaking, adocument which they do not disavow and have in fact annexed to their petition. Second, on theassumption that they are liable to Ortigas under the 1982 Undertaking, petitioners argue that

they are jointly liable only, and not solidarily. Further assuming that they are liable, petitionersalso submit that they are not liable for interest and if at all, the proper interest rate is 6% and not12%.

Interestingly, petitioners do not challenge, whether in their petition or their memorandum beforethe Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if thepleadings, supporting affidavits, depositions and admissions on file show that, except as to theamount of damages, there is no genuine issue as to any material fact and that the moving partyis entitled to a judgment as a matter of law. Petitioner have not attempted to demonstrate beforeus that there existed a genuine issue as to any material fact that would preclude summary

 judgment. Thus, we affirm with ease the common rulings of the lower courts that summary judgment is an appropriate recourse in this case.

The vital issue actually raised before us is whether petitioners were correctly held liable toOrtigas on the basis of the 1982 Undertaking in this Summary Judgment. An examination of thedocument reveals several clauses that make it clear that the agreement was brought forth by the

desire of Ortigas, Inductivo and the Scholeys to be released from their liability under the loanagreement which release was, in turn, part of the consideration for the assignment of their shares in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas had boundhimself with Falcon for the payment of the loan with PDCP, and that “amongst the considerationfor OBLIGORS and/or their principals aforesaid selling is SURETIES’ relieving OBLIGORS of any and all liability arising from their said joint and several undertakings with FALCON.”[23] Mostcrucial is the clause in Paragraph 3 of the Undertaking wherein petitioners “irrevocably agreeand undertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP x x x under thefollowing terms and conditions.”[24] 

 At the same time, it is clear that the assumption by petitioner s of Ortigas’s “guarantees” [sic] toPDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by “any of OBLIGORS” of any demand from PDCP for thepayment of Falcon’s obligations with it, “any of OBLIGORS” was to immediately inform“SURETIES” thereof so that the latter can timely take appropriate measures. Second, should“any and/or all of OBLIGORS” be impleaded by PDCP in a su it for collection of its loan,“SURETIES agree[d] to defend OBLIGORS at their own expense, without prejudice to anyand/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogationor other relief”[25] in respect to any of the claims of PDCP. Third, if any of the “OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment.”[26] 

Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not “made topay” PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP theamount of P1.3 Million as an amicable settlement of the claims posed by the bank against him.However, the subject clause in paragraph 3(c) actually reads “[i]n the event that any of OBLIGORS is for any reason made to pay any amount to PDCP x x x”[27]  As pointed out byOrtigas, the phrase “for any reason” reasonably includes any extra-judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that thephrase was incorporated in the clause to render the eventual payment adverted to thereinunlimited and unqualified.

The interpretation posed by petitioners would have held water had the Undertaking made clear 

that the right of Ortigas to seek reimbursement accrued only a fter he had delivered payment toPDCP as a consequence of a final and executory judgment. On the contrary, the clear intent o f the Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow“OBLIGORS” as soon as possible, and not only after Ortigas had been subjected to a final andexecutory adverse judgment.

Paragraph 1 of the Undertaking enjoins petitioners to “exert all e fforts to cause PDCP x x x towithin a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP xx x”[28]  In the event that Ortigas and his fellow “OBLIGORS” could not be released from their guaranties, paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falconto make a call on its stockholders for the payment of their unpaid subscriptions and to p ledge or assign such payments to Ortigas, et al ., as security for whatever amounts the latter may be heldliable under their guaranties. In addition, paragraph 1 also makes clear that nothing in theUndertaking “shall prevent OBLIGORS, or any one of them, from themselves negotiating withPDCP x x x for the release of their said guarantees [sic].”[29] 

There is no argument to support petitioners’ position on the import of the phrase “made to pay”

in the Undertaking, other than an unduly literalist reading that is clearly inconsistent with thethrust of the document. Under the Civil Code, the various stipulations of a contract shall beinterpreted together, attributing to the doubtful ones that sense which may result from all o f themtaken jointly.[30] Likewise applicable is the provision that if some stipulation of any contractshould admit of several meanings, it shall be understood as bearing

that import which is most adequate to render it effectual.[31]  As a means to effect the generalintent of the document to relieve Ortigas from liability to PDCP, it is h is interpretation, not that of petitioners, that holds sway with this Court.

Neither do petitioners impress us of the non-fulfillment of any of the other conditions set inparagraph 3, as they claim. Following the general assertion in the petition that Ortigas violatedthe terms of the Undertaking, petitioners add that Ortigas “paid PDCP BANK the amount of P1.3million without petitioners ESCANO and SILOS’s knowledge and consent.”[32] Paragraph 3(a) of the Undertaking does impose a requirement that any of the “OBLIGORS” shall immediatelyinform “SURETIES” if they received any demand for payment of FALCON’s obligations to

PDCP, but that requirement is reasoned “so that the [SURETIES] can timely take appropriatemeasures”[33] presumably to settle the obligation without having to burden the “OBLIGORS.” Thisnotice requirement in paragraph 3(a) is markedly way off from the suggestion of petitioners thatOrtigas, after already having been impleaded as a defendant in the collection suit, was obligedunder the 1982 Undertaking to notify them before settling with PDCP.

The other arguments petitioners have offered to escape liability to Ortigas are similarly weak:Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas

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had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumptionof Solidary Liability not in his personal capacity, but as an officer of Falcon. However, suchposition, according to petitioners, could not be justified since Ortigas later voluntarily paid PDCPthe amount of P1.3 Million. Such circumstances, according to petitioners, amounted to estoppelon the part of Ortigas.

Even as we entertain this argument at depth, its p remises are still erroneous. The PartialCompromise Agreement between PDCP and Ortigas expressly stipulated that Ortigas’s offer topay PDCP was conditioned “without [Ortigas’s] admitting liability to plaintiff PDCP Bank’scomplaint, and to terminate and dismiss the said case as against Ortigas solely.”[34] Petitionersprofess it is “unthinkable” for Ortigas to have voluntarily paid PDCP without admitting hisliability,[35] yet such contention based on assumption cannot supersede the literal terms of the

Partial Compromise Agreement.

Petitioners further observe that Ortigas made the payment to PDCP after he had alreadyassigned his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP didpursue a judicial claim against Ortigas notwithstanding the Undertaking he executed withpetitioners. Not being a party to such Undertaking, PDCP was not precluded by a contract frompursuing its claim against Ortigas based on the o riginal Assumption of Solidary Liability.

 At the same time, the Undertaking did not preclude Ortigas from relieving his distress through asettlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that“nothing herein shall prevent OBLIGORS, or any one of them, from themselves negotiating withPDCP x x x for the release of their said guarantees [sic].”[36] Simply put, the Undertaking did notbar Ortigas from pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from petitioners whatever amount he may have paid PDCP through hisown settlement. The stipulation that if Ortigas was “for any reason made to pay any amount toPDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)calendar days from such payment”[37] makes it clear that petitioners remain liable to reimburse

Ortigas for the sums he paid PDCP.

We now turn to the se t of arguments posed by petitioners, in the alternative, that is, on theassumption that they are indeed liable.

Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claimingthat the Undertaking did not provide for express solidarity. They cite Article 1207 of the NewCivil Code, which states in part that “[t]here is a solidary liability only when the obligationexpressly so states, or when the law or the nature of the ob ligation requires solidarity.” 

Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for theUndertaking, as the language used in the agreement “clearly shows that it is a suretyagreement”[38] between the obligors (Ortigas group) and the sureties (Escaño group). Ortigaspoints out that the Undertaking uses the word “SURETIES” although the document, indescribing the parties. It is further contended that the principal objective of the parties inexecuting the Undertaking cannot be attained unless petitioners are solidarily liable “becausethe total loan obligation can not be paid or se ttled to free or release the OBLIGORS if one or anyof the SURETIES default from their obligation in the Undertaking.”[39] 

In case, there is a concurrence of two or more creditors or of two or more debtors in oneand the same obligation, Article 1207 of the Civil Code states that among them, “[t]here is asolidary liability only when the obligation expressly so states, or when the law or the na ture of the obligation requires solidarity.” Article 1210 supplies further caution against the br oadinterpretation of solidarity by providing: “The indivisibility of an obligation does not necessarilygive rise to solidarity. Nor does solidarity of itself imply indivisibility.” 

These Civil Code provisions establish that in case of concurrence of two or more creditorsor of two or more debtors in one and the same obligation, and in the absence of express andindubitable terms characterizing the obligation as solidary, the presumption is that the obligationis only joint. It thus becomes incumbent upon the party alleging that the obligation is indeedsolidary in character to prove such fact with a preponderance of evidence.

The Undertaking does not contain any express stipulation that the petitioners agreed “to bind

themselves jointly and severally” in their obligations to the Ortigas group, or any such terms tothat effect. Hence, such obligation established in the Undertaking is presumed only to be joint.Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcomethe presumption of jointness of obligations. We rule and so hold that he failed to discharge suchburden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves inthe Undertaking as “SURETIES”, a term repeated no less than thirteen (13) times in thedocument. Ortigas claims that such manner of identification sufficiently establishes that theobligation of petitioners to him was joint and solidary in nature.

The term “surety” has a specific meaning under our Civil Code. Article 2047 provides thestatutory definition of a surety agreement, thus:

 Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill theobligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the p rincipal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.[Emphasis supplied][40] 

 As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarilywith the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposesthe existence of a principal contract. It appears that Ortigas’s argument rests solely on thesolidary nature of the obligation of the surety under Article 2047. In tandem with thenomenclature “SURETIES” accorded to petitioners and Matti in the Undertaking, however, thisargument can only be viable if the obligations established in the Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly is not thecase here, notwithstanding the use of the nomenclature “SURETIES” in the Undertaking. 

 Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the suretyis solidarily bound by way of an ancillary obligation of segregate identity from the obligationbetween the principal debtor and the creditor. The suretyship does bind the surety to the

creditor, inasmuch as the latter is vested with the right to proceed against the former to collectthe credit in lieu of proceeding against the p rincipal debtor for the same obligation.[41]  At thesame time, there is also a legal tie created between the surety and the principal debtor to whichthe creditor is not privy or party to. The moment the surety fully answers to the creditor for theobligation created by the principal debtor, such obligation is extinguished.[42]  At the same time,the surety may seek reimbursement from the principal debtor for the amount paid, for the suretydoes in fact “become subrogated to all the rights and remedies of the creditor.”[43] 

Note that Article 2047 itself specifically calls for the application of the provisions on joint andsolidary obligations to suretyship contracts.[44]  Article 1217 of the Civil Code thus comes intoplay, recognizing the right of reimbursement from a co-debtor (the p rincipal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).[45] However, a significant distinction stilllies between a joint and several debtor, on one hand, and a surety on the other. Solidaritysignifies that the creditor can compel any one of the joint and several debtors or the surety aloneto answer for the entirety of the principal debt. The d ifference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out tothe creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

 A guarantor who binds himself in solidum with the principal debtor under the provisions of thesecond paragraph does not become a solidary co-debtor to all intents and purposes.There is adifference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has beenexhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him inSection 4, Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship.The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; andthe civil law relationship existing between the co-debtors liable in solidum is similar to thecommon law suretyship.[46] 

In the case of joint and severa l debtors, Article 1217 makes plain that the solidary debtor whoeffected the payment to the creditor “may claim from his co-debtors only the share whichcorresponds to each, with the interest for the payment already made.” Such solidary debtor willnot be able to recover from the co-debtors the full amount already paid to the creditor, because

the right to recovery extends only to the proportional share of the other co-debtors, and not as tothe particular proportional share of the solidary debtor who already paid. In contrast, even as thesurety is solidarily bound with the principal debtor to the creditor, the surety who does pay thecreditor has the right to recover the full amount paid, and not just any proportional share, fromthe principal debtor or debtors. Such right to full re imbursement falls within the other rights,actions and benefits which pertain to the surety by reason of the subsidiary obligation assumedby the surety.

What is the source of this right to full reimbursement by the surety? We find the right under  Article 2066 of the Civil Code, which assures that “[t]he guarantor who pays for a debtor must beindemnified by the latter,” such indemnity comprising of, among others, “the total amount of thedebt.”[47] Further , Article 2067 of the Civil Code likewise establishes that “[t]he guarantor whopays is subrogated by virtue thereof to all the rights which the creditor had against the debtor .”[48] 

 Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that theprovisions should not extend to sureties, especially in light of the qualifier in Article 2047 that theprovisions on joint and several obligations should apply to sureties. We reject that argument,and instead adopt Dr. Tolentino’s observation that “[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3 , Title I, Book IV, on solidary or severalobligations, however, does not mean that suretyship is withdrawn from the applicable provisionsgoverning guaranty.”[49] For if that were not the implication, there would be no material differencebetween the surety as defined under Article 2047 and the joint and several debtors, for bothclasses of obligors would be governed by exactly the same rules and limitations.

 Accordingly, the rights to indemnification and subrogation as established and granted to theguarantor by Articles 2066 and 2067 extend as well to sureties as de fined under Article 2047.These rights granted to the surety who pays materially differ from those granted under Article1217 to the solidary debtor who pays, since the “indemnification” that pertains to the latter extends “only [to] the share which corresponds to each [co-debtor].” It is for this reason that theCourt cannot accord the conclusion that because petitioners are identified in the Undertaking as“SURETIES,” they are consequently joint and severally liable to Ortigas. 

In order for the conclusion espoused by Ortigas to hold, in light of the general p resumption

favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti,there is one or some of them who stand as the principal debtor to Ortigas and another as suretywho has the right to full reimbursement from the principal debtor or debtors. No suggestion ismade by the parties that such is the case, and certainly the Undertaking is not revelatory of suchintention. If the Court were to give full fruition to the use o f the term “SURETIES” as conclusiveindication of the existence of a surety agreement that in turn gives rise to a solidary obligation topay Ortigas, the necessary implication would be to lay down a corresponding set of rights andobligations as between the “SURETIES” which petitioners and Matti did not clearly intend. 

It is not impossible that as between Escaño, Silos and Matti, there was an agreement wherebyin the event that Ortigas were to seek reimbursement from them per the terms of theUndertaking, one of them was to act as surety and to pay Ortigas in full, subject to his right tofull reimbursement from the other two obligors. In such case, there would have been, in fact, asurety agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was indeedsuch an agreement, it does not appear on the record. More consequentially, no such intention isreflected in the Undertaking itself, the very document that creates the conditional obligation thatpetitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere utilization of 

the term “SURETIES” could not work to such effect, especially as it does not appear who exactlyis the principal debtor whose obligation is “assured” or “guaranteed” by the surety. 

Ortigas further argues that the nature of the Undertaking requires “solidary obligation of theSureties,” since the Undertaking expressly seeks to “reliev[e] ob ligors of any and all liabilityarising from their said joint and several undertaking with [F]alcon,” and for the “sureties” to“irrevocably agree and undertake to assume all of obligors said guarantees to PDCP.”[50] We donot doubt that a finding of solidary liability among the petitioners works to the benefit of Ortigasin the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause thatestablishes petitioners’ obligation to Ortigas as solidary. Moreover, the aims adverted to byOrtigas do not by themselves establish that the nature of the obligation requires solidarity. Evenif the liability of petitioners and Matti were adjudged as merely joint, the full relief andreimbursement of Ortigas arising from his payment to PDCP would still be accomplished throughthe complete execution of such a judgment.

Petitioners further claim that they are not liable for attorney’s fees since the Undertaking

contained no such stipulation for attorney’s fees, and that the situation did not fall under theinstances under Article 2208 of the Civil Code where attorney’s fees are recoverable in theabsence of stipulation.

We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his beingimpleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means toobtain the release of Ortigas and the Scholeys from their previous obligations as sureties of Falcon, especially considering that they were already divesting their shares in the corporation.

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Specific provisions in the Undertaking obligate petitioners to work for the release of Ortigas fromhis surety agreements with Falcon. Specific provisions likewise mandate the immediaterepayment of Ortigas should he still be made to pay PDCP by reason o f the guarantyagreements from which he was ostensibly to be released through the efforts of petitioners. Noneof these provisions were complied with by petitioners, and Article 2208(2) precisely allows for the recovery of attorney’s fees “[w]hen the defendant’s act or omission has compelled theplaintiff to litigate with third persons or to incur expenses to protect his interest.” 

Finally, petitioners claim that they should not be liable for interest since the Undertaking doesnot contain any stipulation for interest, and assuming that they are liable, that the rate of interestshould not be 12% per annum, as adjudged by the RTC.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeal s[51]

 set forth the rules withrespect to the manner of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determ ining the measure of recoverabledamages.

II. With regard particularly to an award of interest in the concept of actual and compensatorydamages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., aloan or forbearance of money, the interest due should be that which may have been stipulated inwriting. Furthermore, the interest due shall itself earn legal interest from the time it is judiciallydemanded. In the absence of stipulation, the rate of interest shall be 12% per annum to becomputed from default, i.e., from judicial or extrajudicial demand under and subject to theprovisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an intereston the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damagesexcept when or until the demand can be established with reasonable certainty. Accordingly,where the demand is established with reasonable certainty, the interest shall begin to run fromthe time the claim is made judicially or extrajudicially (Ar t. 1169, Civil Code) but when suchcertainty cannot be so reasonably established at the time the demand is made, the interest shallbegin to run only from the date the judgment of the court is made (at which time quantification of damages may be deemed to have been reasonably ascertained). The actual base for thecomputation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, therate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, sha ll be12% per annum from such finality until its satisfaction, this interim period being deemed to be bythen an equivalent to a forbearance of credi t.[52] 

Since what was the constituted in the Undertaking consisted of a payment in a sum of money,the rate of interest thereon shall be 12% per annum to be computed from default, i.e., from

 judicial or extrajudicial demand. The interest rate imposed by the RTC is thus proper. However,the computation should be reckoned from judicial or extrajudicial demand. Per records, there isno indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paidPDCP, but on 14 March 1994, Ortigas made a judicial demand when he filed a Th ird-PartyComplaint praying that petitioners and Matti be made to reimburse him for the payments madeto PDCP. It is the filing of this Third Party Complaint on 14 March 1994 that should beconsidered as the date of judicial demand from which the computation of interest should bereckoned.[53] Since the RTC held that interest should be computed from 28 February 1994, theappropriate redefinition should be made.

WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Courtdated 5 October 1995 is MODIFIED by declaring that petitioners and Joseph M. Matti are only

 jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the amountof P1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in

that the legal interest of 12% per annum on the amount of P1,300,000.00 is to be computedfrom 14 March 1994, the date of judicial demand, and not from 28 February 1994 as directed inthe Order of the lower court. The assailed rulings are affirmed in all other respects. Costsagainst petitioners.

SO ORDERED.

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,assailing the Decision[1] dated February 28, 2006 and the Resolution[2] dated August 9, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 80362.

Bank of Commerce vs. FloresThe facts of the case are as follows:

Respondents filed a case for specific performance against petitioners before the RegionalTrial Court (RTC) of Quezon City, docketed as Civil Case No. Q-98-35425. Respondents are the

registered owners of a condominium unit in Embassy Garden Homes, West Triangle, QuezonCity, registered under Condominium Certificate of Title (CCT) No. 2130,[3] issued by the Register of Deeds of Quezon City.[4] 

On October 22, 1993, respondents borrowed money from petitioner bank in the amount of Nine Hundred Thousand Pesos (P900,000.00). Respondents executed a Real EstateMortgage[5] over the condominium unit as collateral, and the same was annotated at the back of CCT No. 2130.

On October 3, 1995, respondents again borrowed One Million One Hundred ThousandPesos (P1,100,000.00) from petitioner bank, which was also secured by a mortgage over thesame property annotated at the back of CCT No. 2130.[6] 

On January 2, 1996, respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos and 54 centavos (P1,011,555.54), as evidenced by Official Receipt No.147741[7] issued by petitioner bank. On the face o f the receipt, it was written that the payment

was “in full payment of the loan and interest.” Respondents then asked petitioner bank to cancelthe mortgage annotations on CCT No. 2130 since the loans secured by the real estate mortgagewere already paid in full. However, the bank refused to cancel the same and demandedpayment of Four Million Six Hundred Thirty-Three Thousand Nine Hundred Sixteen Pesos andSixty-Seven Centavos (P 4,633,916.67), representing the outstanding obligation of respondentsas of February 27, 1998. Respondents requested for an accounting which would explain howthe said amount was arrived at. However, instead of heeding respondents’ request, petitioner bank applied for extra-judicial foreclosure of the mortgages over the condominium unit. The

public auction sale was scheduled on September 4, 1998. Petitioner Stephen Z. Taala, a notarypublic, was tasked to preside over the auction sale.[8] 

Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosureand auction sale of the property. They averred that the loans secured by the property hadalready been paid in full. Furthermore, they claimed that the Notice of Auction Sa le by NotaryPublic[9] failed to comply with the provisions of Act No. 3135, as amended by Act No. 4118,requiring the publication and posting of the notice of auction sale in at least three (3) publicplaces in Quezon City.[10]Respondents likewise prayed for the payment of moral and exemplarydamages, and attorney’s fees, and for the issuance of a temporary restraining order and/or writof preliminary injunction to enjoin the extra-judicial foreclosure sale of the property.[11] 

On October 23, 1998, the RTC granted respondents’ prayer for issuance of a writ of preliminaryinjunction, restraining petitioner bank from foreclosing on the mortgage.[12] 

Petitioner bank admitted that there were only two (2) mortgage loans annotated at theback of CCT No. 2130, but denied that respondents had already fully settled their outstandingobligations with the bank.[13] It averred that several credit lines were granted to respondent

 Andres Flores by petitioner bank that were secured by promissory notes executed by him, andwhich were either increased or extended from time to time. The loan that was paid on January 2,1996, in the amount of P1,011,555.54, was only one of h is loans with the bank. There wereremaining loans already due and demandable, and had not been paid by respondents despiterepeated demands by petitioner bank. The remaining loans, although not availed of at the sametime, were similarly secured by the subject real estate mortgage as provided in the continuingguaranty agreement therein.[14] 

Petitioner bank alleged that respondents requested and were granted an increase in their Bills Discounted Line from Nine Hundred Thousand Pesos (P900,000.00) to Two Million Pesos(P2,000,000.00), which was secured by the same rea l estate mortgage on CCT No. 2130.

However, the subject condominium unit commanded only a market value of One Million SevenHundred Twenty-Three Thousand Six Hundred Pesos (P1,723,600.00), and a loan value of NineHundred Fifty-Nine Thousand Six Hundred Sixteen Pesos (P959,616.00). Since the marketvalue of the condominium unit was lower than the combined loans, the parties agreed to fix theamount of the real estate mortgage at P1,100,000.00. Moreover, petitioner bank stressed thatunder the terms of the two real estate mortgages, future loans of respondents were alsocovered.[15] 

On December 4, 2002, the RTC rendered a resolution,[16] the fallo of which reads:

FROM THE FOREGOING MILIEU, the present case for specific performance withdamages and injunction filed by plaintiffs, Sps. Andres and Eliza Flores against defendants,Bank of Commerce and Stephen Z. Taala, is hereby DISMISSED. Likewise, the counterclaimfiled by defendants, Bank of Commerce and Stephen Z. Taala against plaintiffs, Sps. Andresand Eliza Flores is DISMISSED for insufficiency of evidence.

SO ORDERED.[17] 

In denying respondents’ complaint for specific performance, the RTC ratiocinated thatrespondents’ right of action hinged mainly on the veracity of their claim that they faithfullycomplied with their loan obligations and had fully paid them in January 1996. The RTC statedthat the evidence submitted by petitioner bank, specifically the promissory notes and statementof account dated February 27, 1998, negated this contention. The RTC declared thatrespondents incurred other debts from petitioner bank, which must be pa id first before theycould be absolved of liability, and, consequently, demand the release of the mortgage. TheRTC also struck down respondents’ assertion that petitioner bank did not comply with theposting and publication requirements under Act No. 3135, as amended.

Respondents filed a motion for reconsideration, which was, however, denied by the RTC in adecision[18] dated August 8, 2003.

 Aggrieved, respondents appealed to the CA.

Meanwhile, on March 25, 2004, the auction sale of the subject p roperty was conducted, andpetitioner bank was awarded the property, as the highest bidder.

On February 28, 2006, the CA rendered a Decision[19] reversing the decision and the resolutionof the RTC. The dispositive portion of the CA Decision reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED; the challengedDecision dated December 4, 2002, is REVERSED and SET ASIDE; and a new one entered:

(a) ordering the cancellation of the real estate mortgage annotations on the dorsal side of CCTNo. 2130 of the Registry of Deeds o f Quezon City;

(b) ordering appellee Bank to issue a corresponding release of mortgages to plaintiffs-appellants’ CCT No. 2130; 

(c) declaring null and void the challenged extra-judicial foreclosure and public auction sale heldon March 25, 2004 together with the Certificate of Sale dated April 14, 2004 issued in favor of 

appellee Bank; and,

(d) appellees’ counterclaims are ordered dismissed, for lack of sufficient basis therefor.

No costs.

SO ORDERED.[20] 

The CA ratiocinated that the principal obligation or loan was already extinguished by thefull payment thereof. Consequently, the real estate mortgages securing the principal obligationwere also extinguished. A real estate mortgage, being an accessory contract, cannot survivewithout the principal obligation it secures. The CA also noted that the two mortgages wereindividually annotated at the back of CCT No. 2130. Thus, the CA opined that the individualannotations clearly indicated that the said mortgages were not meant to serve as a continuingguaranty for any future loan that respondents would obtain from petitioner bank.

Petitioners filed a motion for reconsideration. On August 9, 2006, the CA issued aResolution[21] denying the same.

Hence, the instant petition.

The sole issue for reso lution is whether the real estate mortgage over the subjectcondominium unit is a continuing guaranty for the future loans o f respondent spouses despitethe full payment of the principal loans annotated on the title of the subject property.

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We resolve this issue in the affirmative.

The contested portion of the Deed of Real Estate Mortgage dated October 22, 1993 for the principal obligation of P900,000.00 and of the second one dated October 3, 1995 for thesum of P1,100,000.00, uniformly read:

WITNESSETH: That

for and in consideration of the credit accommodations granted by the MORTGAGEE [Bank of Commerce] to the MORTGAGOR [Andres Flores] and/or _____________________ herebyinitially fixed at _____________________________PESOS: (P____________), PhilippineCurrency, and as security for the payment of the same, on demand or at maturity as the case

may be, be the interest accruing thereon, the cost of collecting the same, the cost of keeping themortgaged property(ies), of all amounts now owed or hereafter owing by the MORTGAGOR tothe MORTGAGEE under this or separate instruments and agreements, or in respect of any bill,note, check, draft accepted, paid or discounted, or advances made and all other obligations toevery kind already incurred o r which may hereafter be incurred, for the use or accommodation of the MORTGAGOR, as well as the faithful performance of the terms and conditions of thismortgage and of the separate instruments and/or documents under which credits have been or may hereafter be advanced by the MORTGAGEE to the MORTGAGOR, including their renewals, extensions and substitutions, any and all of which separate instruments and/or documents and their renewals, extensions and substitutions are hereunto incorporated andmade integral parts hereof, the MORTGAGOR [Andres Flores] has transferred and conveyed,as by these presents it/he does hereby transfer and convey, by way of First Mortgage, to theMORTGAGEE [Bank of Commerce], its successors and assigns, a ll its/ his rights, title andinterest to that parcel(s) of land, together with all the buildings and improvements now existingor which may hereafter be erected or constructed thereon, including all other rights or benefitsannexed to or inherent therein now existing or which may hereafter exist, situated in EmbassyGarden Homes, Quezon City, Philippines, and more particularly described in Original/Transfer 

Certificate(s) of Title No. CCT No. 2130 of the Registry of Deeds [of] Quezon City, as follows:

CCT No. 2130

Unit No. L-2, located on Building L, consisting o f Ninety Five point Twenty (95.20) SquareMeters, more of less, with Parking Space No. L-2.[22] 

It is petitioner bank’s contention that the said undertaking, stipulated in the Deed of RealEstate Mortgage dated October 22, 1993 and October 3, 1995, is a continuing guaranty meantto secure future debts or credit accommodations granted by petitioner bank in favor of respondents. On the other hand, respondents posit that, since they have already paid theloans secured by the real estate mortgages, the mortgage should not be foreclosed because itdoes not include future debts of the spouses or debts not annotated at the back of CCT No.2130.

 A continuing guaranty is a recognized exception to the rule that an action to foreclose amortgage must be limited to the amount mentioned in the mortgage contract.[23] Under Article2053 of the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contractsdenominated as a continuing guaranty or suretyship. A continuing guaranty is not limited to asingle transaction, but contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation andis generally intended to provide security with respect to future transactions within certain limits,and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomesliable. In other words, a continuing guaranty is one that covers all transactions, including thosearising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof .[24] 

 A guaranty shall be construed as continuing when, by the terms thereof, it is evident thatthe object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expresslyreserved. In other jurisdictions, it has been held that the use of particular words andexpressions, such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum,"

or the guaranty of "any transaction" or money to be furnished the principal deb tor "at any time"or "on such time" that the p rincipal debtor may require, has been construed to indicate acontinuing guaranty.[25] 

In the instant case, the language of the real estate mortgage unambiguously reveals thatthe security provided in the real estate mortgage is continuing in nature. Thus, it was intendedas security for the payment of the loans annotated at the back of CCT No. 2130, and as securityfor all amounts that respondents may owe petitioner bank. It is well settled that mortgages givento secure future advance or loans are valid and legal contracts, and that the amounts named asconsideration in said contracts do not limit the amount for which the mortgage may stand assecurity if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.[26] 

 A mortgage given to secure advancements is a continuing security and is not dischargedby repayment of the amount named in the mortgage until the full amounts of the advancementsare paid.[27] Respondents’ full payment of the loans annotated on the title of the property shallnot effect the release of the mortgage because, by the express terms of the mortgage, it was

meant to secure all future debts of the spouses and such debts had been obtained and remainunpaid. Unless full payment is made by the spouses of all the amounts that they have incurredfrom petitioner bank, the property is burdened by the mortgage.

WHEREFORE, in view of the foregoing, the Decision da ted February 28, 2006 and theResolution dated August 9, 2006 of the Court o f Appeals in CA-G.R. CV No. 80362 arehereby REVERSED and SET ASIDE. The decision of the Regional Trial Court dated December 4, 2002 is hereby REINSTATED.

SO ORDERED.

Vda. De Jayme vs CAThis petition assails the decision[2] dated September 19, 1996, of the Court of Appeals in CA-G.R. CV No. 46496 and its resolution[3] dated February 21, 1997, denying the motion for reconsideration. Said decision had affirmed that of the Regional Trial Court of Cebu City,Branch 15, in Civil Case No. CEB-21369 for Annulment of Contract and Damages with Prayer 

for the Issuance of Preliminary Injunction. [4]

 The following facts are borne by the records:The spouses Graciano and Mamerta Jayme are the registered owners of Lot 2700, situated inthe Municipality of Mandaue (now Mandaue City), Cebu, consisting of 2,568 sq.m. and coveredby Transfer Certificate of Title No. 8290.On January 8, 1973, they entered into a Contract of Lease[5] with George Neri, president of 

 Airland Motors Corporation (now Cebu Asiancars Inc.), covering one-half of Lot 2700. The leasewas for twenty (20) years.

The terms and conditions of the lease contract[6] stipulated that Cebu Asiancars Inc. (hereafter, Asiancars) may use the leased premises as a collateral to secure payment of a loan which Asiancars may obtain from any bank, provided that the proceeds of the loan shall be used solelyfor the construction of a building whic h, u pon the termi nati on of t he leas e o r th evolu ntar y s urr ende r o f t he leas ed premi ses before the expiration of the contract, shallautomatically become the property of the Jayme spouses (the lessors).

 A Special Power of Attorney[7] dated January 26, 1974, was executed in favor of respondentGeorge Neri, who used the lot to secure a loan of P300,000 from the General Bank and TrustCompany. The loan was fully paid on August 14, 1977.[8] In October 1977, Asiancars obtained a loan of P6,000,000 from the Metropolitan Bank and TrustCompany (MBTC). The entire Lot 2700 was offered as one of several properties given ascollateral for the loan. As mortgagors, the spouses signed a Deed of Real Estate

Mortgage[9]

 dated November 21, 1977 in favor of MBTC. It stated that the deed was to securethe payment of a loan obtained by Asiancars from the bank.To assure the Jayme spouses, Neri and the other officers of Asiancars, namely Benny LiongbenLee, William Leong Koc Lee, Connie U. Neri, Edward James Lee, Roberto Uykim and CharlesP. Uykim, executed an undertaking[10] dated November 7, 1977. In it they promised, in their personal capacities and/or in representation of Cebu Asiancars, Inc., “to compensate Mr. & Mrs.Graciano Jayme for any and all or whatever damage they may sustain or suffer by virtue andarising out of the mortgage to MBTC of the aforestated parcel of land.”[11] In addition, Neri wrotea letter dated September 1, 1981[12] addressed to Mamerta Jayme acknowledging her “confidence and help” extended to him, his family and Asiancars. He promised to pay their indebtedness to MBTC before the loan was due.Meeting financial difficulties and incurring an outstanding balance on the loan, Asiancarsconveyed ownership of the building on the leased premises to MBTC, by way of “dacion en

 pago.”[13] The building was valued at P980,000 and the amount was applied as partial paymentfor the loan. There still remained a balance of P2,942,449.66, which Asiancars failed to pay.Eventually, MBTC extrajudicially foreclosed the mortgage. A public auction was held onFebruary 4, 1981. MBTC was the highest bidder for P1,067,344.35. A certificate of sale was

issued and was registered with the Register of Deeds on February 23, 1981.Meanwhile, Graciano Jayme died, survived by his w idow Mamerta and their children. As a resultof the foreclosure, Graciano’s heirs filed a civil complaint,[14] in January of 1982, for Annulment of Contract with Damages with Prayer for Issuance of P reliminary Injunction, against respondent

 Asiancars, its officers and incorporators and MBTC. Later, in 1999, Mamerta Jayme alsopassed away.Petitioners claim that Neri and Asiancars did not tell them that the indebtedness secured by themortgage was for P6,000,000 and that the security was the whole of Lot 2700. Petitioners allegethat the deed presented to the Jayme spouses was in blank, without explanation on thestipulations contained therein, except that its conditions were identical to those of thestipulations when they mortgaged half the lot’s area previously with General Bank. Petitionersalso alleged that the Jayme spouses were illiterate and only knew how to sign their names. That because they did not know how to read nor write, and had given their full trust andconfidence to George Neri, the spouses were dece ived into signing the Deed of Real EstateMortgage. Their intention as well as consent was only to be bound as guarantors.Respondents deny that any fraud was employed, nor was there a scheme to make the spousessign as mortgagors instead of guarantors. They aver that the spouses were fully advised andcompensated for the use of their property as co llateral with MBTC; that they voluntarily signedthe deed of mortgage upon the request of George Neri, whom they previously trusted and whofulfilled his promise to pay the loan to General Bank and who obtained the release of the sameproperty by faithfully paying his indebtedness with General Bank.

 After trial, the RTC rendered a decision, disposing as follows:WHEREFORE, in view of the foregoing evidences, arguments and considerations, this Courthereby renders judgment as follows:1. Declaring the Real Estate Mortgage executed by the Jaymes in favor of Metrobank as validand binding;2. Declaring the Undertaking executed by George Neri, Benny Leongben Lee alreadydeceased, William Leong Koc, Connie U. Neri, Edward James Lee, Roberto Uykim, and CharlesP. Uykim on November 7, 1977 to be valid and binding as well upon the signatories thereof;3. Allowing the Jaymes to redeem the mortgaged property, Lot 2700 covered by TCT 8290 of the Register of Deeds of Mandaue City for the amount of P2,942,448.66 plus interest at the rateof 6% per annum within ninety (90) days from date of finality of this judgment untilpaid. However, if the plaintiffs fail to redeem said property, then let a Certificate of Sale/definite

Deed of Sale be issued in favor of Metropolitan Bank and Trust Co. covering sa id Lot 2700;4. Holding the defendants George Neri, William Leong Koc, Connie U. Neri, Edward JamesLee, Roberto Uykim, and Charles Uykim jointly liable on their Undertaking dated November 7,1977 as they are hereby required to reimburse the Jaymes the amount that the Jaymes will payto Metropolitan Bank and Trust Co. for the redemption;5. Requiring the defendants George Neri, William Leong Koc, Connie U. Neri, Edward JamesLee, Roberto Uykim and Charles Uykim to pay jointly attorneys fees to the Jaymes in theamount of P50,000.00;6. Requiring the defendants George Neri, William Leong Koc, Connie U. Neri, Edwards JamesLee, Roberto Uykim and Charles Uykim to pay jointly the cost of this suit.SO ORDERED.[15] Petitioners and respondent MBTC elevated the case to the Court of Appeals, which affirmed theruling of the RTC, with modifications stated in this wise:1. Declaring valid and binding the Real Estate Mortgage executed by plaintiffs in favor of defendant MBTC;2. Declaring valid the foreclosure of the mortgage and the foreclosure sale;3. Declaring that the period to redeem Lot 2700 had expired on February 23, 1982 without

plaintiffs redeeming it;4. Ordering the Sheriff of Mandaue City to issue a definite Deed of Sale covering Lot 2700 infavor of defendant MBTC;5. Declaring valid and binding the dacion en pago executed by defendant Asiancars in favor of defendant MBTC;6. Declaring defendant MBTC as owner of the building on Lot 2700;7. Ordering defendant MBTC to pay to plaintiffs the amount of P92,083.33 for the use of theland from December 18, 1981 to February 23, 1982, with six percent (6%) interest per annumuntil paid;8. Ordering defendant Asiancars, Neris, Uykims, Lee and Koc to pay jointly and severally theplaintiffs the (a) actual value of the lot in the amount of P3,852,000.00; (b) P400,000.00 moraldamages; (c) P150,000.00 exemplary damages and P100,000.00 attorney’s fee, all with sixpercent (6%) interest per annum until fully paid;9. Cost against defendants Asiancars, Neris, Uykims, Lee and Koc.SO ORDERED.[16] Petitioners filed a motion for reconsideration, which the CA denied. Hence, this petition which

assigns the following errors:ITHAT WITH GRAVE ABUSE OF DISCRETION, AMOUNTING TO EXCESS OFJURISDICTION, THE LOWER COURT GROSSLY AND SERIOUSLY ERRED IN DECLARINGVALID AND BINDING THE REAL ESTATE MORTGAGE EXECUTED BY THE PLAINTIFFS INFAVOR OF THE MBTC, FOR SAID DECLARATION IS ILLEGAL AND NOT WELL-FOUNDEDIN LAW BECAUSE IT ULTIMATELY VIOLATED ARTS. 2058, 2076 AND 2077, CIVIL CODE OFTHE PHILIPPINES, SINCE THE REAL ESTATE MORTGAGE, EXH. “G”, IS NOT LEGALLY A

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REAL ESTATE MORTGAGE, BUT RATHER A DEED OF GUARANTY, CONSIDERING THATTHE PLAINTIFF MAMERTA VDA. DE JAYME AND HER HUSBAND GRACIANO JAYME, NOWDECEASED, SIGNED INNOCENTLY THE SAID DOCUMENT ASGUARANTORS/ACCOMODATORS ONLY AND DEFINITELY NOT ASDEBTORS/MORTGAGORS;IITHAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT ERRED IN DECLARINGTHE PERIOD TO REDEEM LOT NO. 2700 HAD EXPIRED ON FEBRUARY 23, 1982,WITHOUT THE PLAINTIFFS REDEEMING IT FOR SUCH DECLARATION IS NOT WELL-FOUNDED IN LAW AND IN FACT;IIITHAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT ERRED IN DECLARING

VALID AND BINDING THE DACION EN PAGO EXECUTED BY DEFENDANT CEBU ASIAN-CARS IN FAVOR OF DEFENDANT MBTC, FOR SAID DECLARATION IS ILLEGAL AND ISCLEARLY FOUNDED ON WANTON BAD FAITH COMMITTED BY BOTH PARTIES, INVIOLATION OF ART. 1312, CIVIL CODE OF THE PHILIPPINES AND SEC. 10, ART. III,CONSTITUTION OF THE PHILIPPINES;IVGRANTING ARGUENDO THAT THE DACION EN PAGO IS VALID, STILL THE LOWERCOURT COMMITTED GRAVE ABUSE OF DISCRETION, BY NOT DECLARING THAT THEP574,690.00 INDEBTEDNESS, INCLUDING INTEREST AND ADDITIONAL CHARGES OFCEBU ASIANCARS WAS COMPLETELY EXTINGUISHED OR PAID OFF, BY WAY OFDACION EN PAGO PURSUANT TO ARTS. 1255, 2076 AND 2077 OF THE CIVIL CODE OFTHE PHILIPPINES.VTHAT THE LOWER COURT COMMITTED GRAVE ABUSE OF DISCRETION, AMOUNTINGTO EXCESS OF JURISDICTION, IN DECLARING VALID AND BINDING THE MORTGAGE

 AND THE CORRESPONDING FORECLOSURE, FOR SAID DECLARATION IS ILLEGAL, INVIOLATION OF ARTS. 1231 (5), 1245 AND 1255, CIVIL CODE AND BY THE INDUBITABLE

EVIDENCE OF ALL THE PARTIES TESTIMONIAL AND DOCUMENTARY, TO THE EFFECTTHAT THE SIX (6) MILLION INDEBTEDNESS OF CEBU ASIANCARS WAS OVERPAID, THUSMBTC ALSO VIOLATED ARTS. 2142, CIVIL CODE OF THE PHILIPPINES;VITHAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT ERRED BY VIOLATINGEXH. “C”, THE CONTRACT OF LEASE, WHICH IS THE LAW BETWEEN THE PARTIES, ANDINSTEAD, DELIBERATELY DECLARED VALID AND BINDING THE MORTGAGE EXH. “G”,

 AND THE FORECLOSURE OF MORTGAGE, AND IN NOT ORDERING MBTC TO VACATETHE PREMISES UPON THE TERMINATION OF THE CONTRACT OF LEASE ON JANUARY9, 1993 PURSUANT TO EXH. “C”, AND LIKEWISE PAY RENTAL THEREAFTER, FOR ITSUSE AT P96,300.00 MONTHLY UNTIL MBTC ACTUALLY VACATES THE PREMISES.[17] On March 13, 2002, the Court set a hearing on this petition, and parties were given thirty daysfor simultaneous submission of their respective memoranda. Petitioners additionally submitted“reply/rejoinder” and respondent MBTC also submitted its “rejoinder – sur-rejoinder.” Two main issues are for our resolution. First , whether or not the REM should be annulled on theground of vitiated consent; and second , whether or not the dacion en pago by Asiancars in favor of MBTC is valid and binding desp ite the stipulation in the lease contract that ownership of thebuilding will vest on the Jaymes at the termination of the lease.The facts show that the spouses a ffixed their signature on the Deed of Real Estate Mortgage, inthe presence of two instrumental witnesses, and duly notarized by Atty. Rodolfo Y. Cabrera. Asa notarized document, it has in its favor the presumption of regularity, and to overcome thispresumption, there must be evidence that is clear, convincing and more than merelypreponderant that there was irregularity in its execution; otherwise, the document should beupheld.[18] The Deed of Real Estate Mortgage entered into by the Jayme spouses partake of a Third PartyMortgage under Art. 2085 (3) of the Civil Code which reads:The following requisites are essential to the contracts of pledge and mortgage: xxx (3) That thepersons constituting the pledge or mortgage have the free disposal of their property, and in theabsence thereof, that they be legally authorized for the purpose.Third persons who are not parties to the principal obligation may secure the latter by pledging o r mortgaging their own property.In the case of Lustan vs. CA, et al .,[19] this Court recognized the abovecited provision and heldthat “so long as valid consent was given, the fact that the loans were so lely for the benefit of (the

debtor) would not invalidate the mortgage with respect to petitioner’s property. In consentingthereto even granting that petitioner may not be assuming personal liability for the debt, her property shall nevertheless secure and respond for the performance of the principal obligation.” Clearly, the law recognizes instances when persons not directly parties to a loan agreementmay give as security their own properties for the principal transaction. In this case, the spousesshould not be allowed to disclaim the va lidity of a transaction they voluntarily and knowinglyentered into for the simple reason that such transaction turned out prejudicial to them later on.Both the trial and appellate courts found that no fraud attended the execution of the deed of mortgage. This is a factual finding that binds this Court. Further, the records clearly show thatthe spouses Jayme agreed to use their property as collateral for Neri’s loan because Neri hadtheir full trust and confidence. Mamerta herself testified that she and her husband were assuredby Neri’s promise that he would take full responsibility for whatever happens to the property of the spouses and that he would comply with his obligations to the bank.[20] The spouses were assisted by their own lawyer, Atty. Cirilo Sanchez, in all their transactions,including the ones with Asiancars and MBTC. Atty. Sanchez even signed as an instrumentalwitness to a Special Power o f Attorney executed by the spouses in favor of Neri, authorizing thelatter to mortgage the same property to MBTC. Although the said SPA was eventually not used

because MBTC required that the spouses themselves execute the REM, still, the fact remainsthat the spouses were already set on allowing the mortgage. In addition, we note that NeliaSanchez, the daughter of the spouses and one of the petitioners herein, admitted that their parents consulted her and her siblings before their parents executed the Deed.[21] With the assistance of a lawyer and consultation with their literate children, the spouses thoughilliterate could not feign ignorance of the stipulations in the deed. Patently, theirs was not avitiated consent. It could not now be justifiably asserted by petitioners that the Jayme spousesonly intended to be bound as guarantors and not as mortgagors.In this jurisdiction, when the property of a third person which has been expressly mortgaged toguarantee an obligation to which the said person is a stranger, said property is directly and

 jointly liable for the fulfillment thereof, in the same manner as the mortgaged property of thedebtor himself.[22] In the case at bar, when Asiancars failed to pay its obligations with MBTC, the properties givenas security (one of them being the land owned by the Jaymes) became subject to foreclosure.When several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the

various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all thethings are liable for such balance.[23]  At the time of the foreclosure, Asiancars had a remaining balance of P2,010,633.28. Thus,MBTC had every right to effect the extrajudicial foreclosure of the mortgaged properties tosatisfy its claim.The appellate court found that the spouses lost their right to redeem their property. Under Section 78 of the General Banking Act then in force,[24] the mortgagor or debtor whose realproperty has been foreclosed and sold at public auction, has the right to redeem the property

within one year from the sale of the real estate as a result of the foreclosure. The reckoning datein the case of a registered land is from the date of registration of the certificate of sale.[25] If noredemption is timely made, the buyer in a foreclosure sale becomes the absolute owner of theproperty purchased.[26] In this case, the certificate of sale was registered on February 23, 1981,giving petitioners until February 23, 1982 to redeem the property. This they failed to do, hence,ownership of the property already vested in the purchaser, private respondent MBTC.Much as we sympathize with petitioners’ plight, we are unable to find merit in their plea for theannulment of the deed of sale covering Lot 2700 as a result of foreclosure of mortgage. Petitioners failed to show the required quantum of evidence that they werefraudulently made to sign as mortgagors. As early as Vales v. Villa, 35 Phil. 769 (1916), thisCourt has sounded a note of warning to litigants:…The law furnishes no protection to the inferior simply because he is inferior any more than it

protects the strong because he is strong. The law furnishes protection to both alike – to one nomore or less than the other. It makes no distinction between the wise and the foolish, the greatand the small, the strong and the weak. The foolish may lose all they have to the wise; but thatdoes not mean that the law will give it back to them again. Courts cannot follow one every stepof his life and extricate him from bad bargains, pro tect him from unwise investments, relieve himfrom one-sided contracts, or annul the effects of foolish acts.[27] Petitioners however, are not without recourse for the loss of their property. Although theycannot go after respondent MBTC, they have in their favor the undertaking executed by GeorgeNeri and other members of his family. The undertaking also bound respondent Asiancars, aswell as its officers who were signatories to the aforesaid Undertaking, to reimburse petitionersfor the damages they suffered by reason of the mortgage.The alienation of the building by Asiancars in favor of MBTC for the partial satisfaction of itsindebtedness is, in our view, also valid. The ownership of the building had been effectively inthe name of the lessee-mortgagor (Asiancars), though with the provision that said ownership betransferred to the Jaymes upon termination of the lease or the voluntary surrender of thepremises. The lease was constituted on January 8, 1973 and was to expire 20 years thereafter,or on January 8, 1993. The alienation via dacion en pago was made by Asiancars to MBTC on

December 18, 1980, during the subsistence of the lease. At this point, the mortgagor, Asiancars,could validly exercise rights of ownership, including the right to alienate it, as it did to MBTC.Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to thecreditor as an accepted equivalent of the performance of the obligation.[28] It is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is the creditor is really buying the thing or property of the debtor, payment for which isto be charged against the debtor’s debt. As such, the essential elements of a contract of sale,namely, consent, object certain, and cause or consideration must be present. In its modernconcept, what actually takes place in dacion en pago is an objective novation of the obligationwhere the thing offered as an accepted equivalent of the performance of an obligation isconsidered as the object of the contract of sale, while the debt is considered as the purchaseprice. In any case, common consent is an essential prerequisite, be it sale or novation, to havethe effect of totally extinguishing the debt or obligation.[29] We also find that the Court of Appeals did not err in considering MBTC as a purchaser in goodfaith. MBTC had no knowledge of the stipulation in the lease contract. Although the same leasewas registered and duly annotated on the certificate of title of Lo t 2700, MBTC was charged withconstructive knowledge only of the fact of lease of the land and not of the specific provisionstipulating transfer of ownership of the building to the Jaymes upon termination of thelease. There was no annotation on the title of any encumbrance.[30] While the alienation was inviolation of the stipulation in the lease contract between the Jaymes and Asiancars, MBTC’sown rights could not be prejudiced by Asiancars’ actions unbeknownst to MBTC. Thus, thetransfer of the building in favor of MBTC was properly held valid and binding by respondentCourt of Appeals.One point, however, has to be cleared. The appellate court ordered MBTC to pay rentals topetitioners at the rate of P25.00 monthly per square meter. For the Asiancars’ building stood onthe lot owned by the petitioners, until the time MBTC also consolidated its ownership over thelot. Rentals would have to be paid starting on December 18, 1980, when the building’sownership was transferred to MBTC, until February 23, 1982, when MBTC finally consolidatedits ownership over Lot 2700. Hence, we agree that there was error in the computation of rentalsby the CA.[31] From December 18, 1980 until February 23, 1982, is a period of 1 year, 2 monthsand 5 days. Thus, MBTC should pay to petitioners rentals for the use of the occupiedlot,[32] consisting of 1,700 sq. m. at the monthly rate of P25.00 per sq. m. for that period, in the

total amount of P602,083.33, with six (6) percent interest per annum until fully paid.Finally, we are in agreement that bad faith attended Asiancars’ transfer of the building toMBTC. Asiancars was well aware of its covenant with the Jaymes that the building’s ownershipwas to be transferred to the Jaymes upon termination of the lease. Indeed, petitioners sufferedmental anxiety and nervous shock upon learning that the ownership of the building standing ontheir property had already been transferred to MBTC. The apparent disregard of petitioners’right by Asiancars and other private respondents provides enough basis for an award of moralas well as exemplary damages[33] by the appellate court.WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED with theMODIFICATION that private respondent MBTC is ordered to pay petitioners rentals in the totalamount of P602,083.33, with six (6) percent interest per annum until fully paid. In all other respects, the assailed decision and resolution of the Court of Appeals areAFFIRMED.SO ORDERED.