JOSE McMICKING, sheriff of Manila, Plaintiff-Appellee, vs. PEDRO MARTINEZ and GO JUNA, defendants.

GO JUNA, Appellant.

M. Legazpi Florendo, for appellant.

Eugenio de Lara, for defendant Pedro Martinez.

MORELAND, J.:

The defendant, Pedro Martinez, some time during the year 1908 obtained judgment in the Court of First Instance of the city of Manila against one
Maria Aniversario; that thereafter execution was issued upon said judgment and the sheriff levied upon a pailebot, Tomasa, alleged to be the property
of said Maria Aniversario; that thereupon the said defendant Go Juna intervened and claimed a lien upon said boat by virtue of a pledge of the same to
him by the said Maria Aniversario made on the 27th day of February, 1907, which said pledge was evidenced by a public instrument bearing that
date.chanroblesvirtualawlibrary chanrobles virtual law library

This action was brought by the sheriff against Go Juna and Pedro Martinez to determine the rights of the parties to the funds in his hands. Maria
Aniversario was not made a party.chanroblesvirtualawlibrary chanrobles virtual law library

The said Pedro Martinez alleged as a defense that the pledge which said document was intended to constitute had not been made effective by delivery
of the property pledged, as required by article 1863 of the Civil Code, and that, therefore, there existed no preference in favor of said Go
Juna.chanroblesvirtualawlibrary chanrobles virtual law library

The court below found with the contention of the said Pedro Martinez, declared a preference in his favor, and ordered the sheriff to pay over the said
funds in consonance therewith. An appeal was taken from said judgment.chanroblesvirtualawlibrary chanrobles virtual law library

The conclusion of the court below that the property was not delivered in accordance with the provisions of article 1863 of the Civil Code is sustained
by the proofs. His conclusion that the pledge was ineffective against Martinez is correct. It appears, however, that the document of pledge is a public
document which contains an admission of indebtedness. In other words, while it is intended to be a pledge, it is also a credit which appears in a public
document. Article 1924, paragraph 3, letter a, is therefore applicable; and, said public document antedating the judgment of defendant Martinez, takes
preference thereover. The validity of that document in so far as it shows an indebtedness against Maria Aniversario and its effectiveness against her
have not, however, been determined. She is not a party to this action. No judgment can be rendered affecting her rights or liabilities under said
instrument. If said instrument is invalid or for any other cause unenforceable against her, it would be wholly unjust, by declaring its preference over a
debt acknowledged by and conclusive against her, to require that said funds be paid over to the holder of said document. That would be to require her
to pay a debt which has not only not been shown to be enforceable against her but which, as a witness for the defendant Martinez on the trial of this
cause, she expressly and vehemently repudiated as a valid claim against her.chanroblesvirtualawlibrary chanrobles virtual law library

The judgement is, therefore, reversed; and it is ordered that the cause be returned to the court below; that the plaintiff bring in Maria Aniversario as a
party to this action, and that she be given an opportunity to make her defense, if she have any, to the document in question under proper procedure. No
finding as to costs. So ordered.

Arellano, C.J., Torres, Mapa, Johnson and Carson, JJ., concur.

G.R. No. L-17072 October 31, 1961

CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,

vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.

Aladin B. Bermudez for defendants-appellants.

Cube and Fajardo for plaintiff-appellee.

REYES, J.B.L., J.:

The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of land covered by a free patent where the mortgage
was executed before the patent was issued and is sought to be foreclosed within five years from its issuance.

The facts of the case appear to be as follows:

On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to secure
payment thereof conveyed to the latter by way of mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac.
The deed of mortgage, Exhibit "A", provided that it was to last for three years, that possession of the land mortgaged was to be turned over to the
mortgagee by way of usufruct, but with no obligation on her part to apply the harvests to the principal obligation; that said mortgage would be released
only upon payment of the principal loan of P2,000 without any interest; and that the mortgagor promised to defend and warrant the mortgagee's rights
over the land mortgaged.

Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana Cainglet (who are Brigida
herself and her three sisters), an application for the issuance of a free patent over the land in question, on the strength of the cultivation and occupation
of said land by them and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the applicants on January 25, 1957,
and on February 22, 1957, it was registered in their names under Original Certificate of Title No. P-888 of the office of Register of Deeds for the
province of Tarlac.

Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the latter, on March 4, 1959, filed the present action
against Brigida and her husband (Civil Case No. 3382) in the court below for the payment thereof, or in default of the debtors to pay, for the foreclosure
of her mortgage on the land give as security. Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent
and could not, therefore, under the Public Land Law, be taken within five years from the issuance of the patent for the payment of any debts of the
1
patentees contracted prior to the expiration of said five-year period; but the lower court denied the motion to dismiss on the ground that the law cited
does not apply because the mortgage sought to be foreclosed was executed before the patent was issued. Defendants then filed their answer, reiterating
the defense invoked in their motion to dismiss, and alleging as well that the real contract between the parties was an antichresis and not a mortgage.
Pre-trial of the case followed, after which the lower court rendered judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso
share of 15,333 square meters in the land in question, on the theory that the Public Land Law does not apply in this case because the mortgage in
question was executed before a patent was issued over the land in question; that the agreement of the parties could not be antichresis because the deed
Exhibit "A" clearly shows a mortgage with usufruct in favor of the mortgagee; and ordered the payment of the mortgage loan of P2,000 to plaintiff or,
upon defendant's failure to do so, the foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in the land in question. From
this judgment, defendants Brigida Marcos and her husband Osmondo Apolocio appealed to this Court.

There is merit in the appeal.

The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on whether she could take said land within the
prohibitive period of five years from the issuance of defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of
mortgage Exhibit "A" is at all valid and enforceable, since the land mortgaged was apparently still part of the public domain when the deed of mortgage
was constituted. As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art.
2085), the mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was not yet the owner of the land
mortgaged and could not, for that reason, encumber the same to the plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title
over said land through the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel (cf. Art. 1434, New Civil
Code,1 since upon the issuance of said patient, the land in question was thereby brought under the operation of the Public Land Law that prohibits the
taking of said land for the satisfaction of debts contracted prior to the expiration of five years from the date of the issuance of the patent (sec. 118, C.A.
No. 141). This prohibition should include not only debts contracted during the five-year period immediately preceding the issuance of the patent but
also those contracted before such issuance, if the purpose and policy of the law, which is "to preserve and keep in the family of the homesteader that
portion of public land which the State has gratuitously given to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic
Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is to be upheld.

The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the collate agreement in the same deed of mortgage
whereby possession of the land mortgaged was transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its harvests
or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with her sisters, was in possession of said land by
herself and through her deceased mother before her since 1915, had possessory rights over the same even before title vested in her as co-owner by the
issuance of the free patent to her and her sisters, and these possessory right she could validly transfer and convey to plaintiff-appellee, as she did in the
deed of mortgage Exhibit "A". The latter, upon the other hand, believing her mortgagor to be the owner of the land mortgaged and not being aware of
any flaw which invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the right to all the fruits received
during the entire period of her possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her credit of P2,000 from
defendants, without any obligation to account for the fruits or benefits obtained by her from the land in question.

WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the mortgage in question, but affirmed in all other
respects. Costs again defendants-appellants.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and De Leon, JJ., concur.
Barrera, J., took no part.

[G.R. No. 131679. February 1, 2000]

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners, vs. SPOUSES CYRUS LIM and LOLITA
CHAN LIM and COURT OF APPEALS, respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals in C.A. GR CV No. 42315 and the order dated December 9, 1997
denying petitioners motion for reconsideration.

The following facts are not in dispute.

Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are banking institutions duly organized and existing
under Philippine laws. On or about June 15, 1983, a certain Rodolfo Guansing obtained a loan in the amount of P90,000.00 from CDB, to secure which
he mortgaged a parcel of land situated at No. 63 Calavite Street, La Loma, Quezon City and covered by TCT No. 300809 registered in his name. As
Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged property
was sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated title to the property in its name. TCT No.
300809 in the name of Guansing was cancelled and, in lieu thereof, TCT No. 355588 was issued in the name of CDB.

On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios Gatpandan, offered to purchase the property from CDB.
The written Offer to Purchase, signed by Lim and Gatpandan, states in part:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for P300,000.00 under the
following terms and conditions:

(1) 10% Option Money;

(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants. Scjuris

2
Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money, for which she was issued Official Receipt
No. 3160, dated June 17, 1988, by CDB. However, after some time following up the sale, Lim discovered that the subject property was originally
registered in the name of Perfecto Guansing, father of mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the property
registered in his name under TCT No. 300809, the same title he mortgaged to CDB and from which the latters title (TCT No. 355588) was derived. It
appears, however, that the father, Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83, Quezon City, for the cancellation
of his sons title. On March 23, 1984, the trial court rendered a decision [2] restoring Perfectos previous title (TCT No. 91148) and cancelling TCT No.
300809 on the ground that the latter was fraudulently secured by Rodolfo. This decision has since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company, FEBTC, on their ability to sell the subject property,
Lim, joined by her husband, filed on August 29, 1989 an action for specific performance and damages against petitioners in the Regional Trial Court,
Branch 96, Quezon City, where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint was amended by impleading the
Register of Deeds of Quezon City as an additional defendant.

On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1) there was a perfected contract of sale between Lim
and CDB, contrary to the latters contention that the written offer to purchase and the payment of P30,000.00 were merely pre-conditions to the sale and
still subject to the approval of FEBTC; (2) performance by CDB of its obligation under the perfected contract of sale had become impossible on account
of the 1984 decision in Civil Case No. Q-39732 cancelling the title in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were not exempt
from liability despite the impossibility of performance, because they could not credibly disclaim knowledge of the cancellation of Rodolfo Guansings
title without admitting their failure to discharge their duties to the public as reputable banking institutions; and (4) CDB and FEBTC are liable for
damages for the prejudice caused against the Lims.[3] Based on the foregoing findings, the trial court ordered CDB and FEBTC to pay private
respondents, jointly and severally, the amount of P30,000.00 plus interest at the legal rate computed from June 17, 1988 until full payment. It also
ordered petitioners to pay private respondents, jointly and severally, the amounts of P250,000.00 as moral damages, P50,000.00 as exemplary damages,
P30,000.00 as attorneys fees, and the costs of the suit. [4]

Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the decision of the Regional Trial Court. Petitioners
moved for reconsideration, but their motion was denied by the appellate court on December 9, 1997. Hence, this petition. Petitioners contend that - Jjlex

1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC were aware of the decision dated March
23, 1984 of the Regional Trial Court of Quezon City in Civil Case No. Q-39732.

2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the deposit of THIRTY THOUSAND PESOS
(P30,000.00) by applying Article 2209 of the New Civil Code.

3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages, exemplary damages, attorneys fees and
costs of suit.

I.

At the outset, it is necessary to determine the legal relation, if any, of the parties.

Petitioners deny that a contract of sale was ever perfected between them and private respondent Lolita Chan Lim. They contend that Lims letter-offer
clearly states that the sum of P30,000.00 was given as option money, not as earnest money. [5] They thus conclude that the contract between CDB and
Lim was merely an option contract, not a contract of sale.

The contention has no merit. Contracts are not defined by the parties thereto but by principles of law. [6] In determining the nature of a contract, the
courts are not bound by the name or title given to it by the contracting parties.[7] In the case at bar, the sum of P30,000.00, although denominated in the
offer to purchase as "option money," is actually in the nature of earnest money or down payment when considered with the other terms of the offer.
In Carceler v. Court of Appeals,[8] we explained the nature of an option contract, viz. -

An option contract is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions,
the power to decide, whether or not to enter into a principal contract, it binds the party who has given the option not to enter into
the principal contract with any other person during the period designated, and within that period, to enter into such contract with
the one to whom the option was granted, if the latter should decide to use the option. It is a separate agreement distinct from the
contract to which the parties may enter upon the consummation of the option. Newmiso

An option contract is therefore a contract separate from and preparatory to a contract of sale which, if perfected, does not result in the perfection or
consummation of the sale. Only when the option is exercised may a sale be perfected.

In this case, however, after the payment of the 10% option money, the Offer to Purchase provides for the payment only of the balance of the purchase
price, implying that the "option money" forms part of the purchase price. This is precisely the result of paying earnest money under Art. 1482 of the
Civil Code. It is clear then that the parties in this case actually entered into a contract of sale, partially consummated as to the payment of the price.
Moreover, the following findings of the trial court based on the testimony of the witnesses establish that CDB accepted Lims offer to purchase:

It is further to be noted that CDB and FEBTC already considered plaintiffs offer as good and no longer subject to a final approval.
In his testimony for the defendants on February 13, 1992, FEBTCs Leomar Guzman stated that he was then in the Acquired Assets
Department of FEBTC wherein plaintiffs offer to purchase was endorsed thereto by Myoresco Abadilla, CDBs senior vice-
president, with a recommendation that the necessary petition for writ of possession be filed in the proper court; that the
recommendation was in accord with one of the conditions of the offer, i.e., the clearing of the property of illegal occupants or
tenants (tsn, p. 12); that, in compliance with the request, a petition for writ of possession was thereafter filed on July 22, 1988
(Exhs. 1 and 1-A); that the offer met the requirements of the banks; and that no rejection of the offer was thereafter relayed to the
plaintiffs (p. 17); which was not a normal procedure, and neither did the banks return the amount of P30,000.00 to the plaintiffs. [9]

Given CDBs acceptance of Lims offer to purchase, it appears that a contract of sale was perfected and, indeed, partially executed because of the partial
payment of the purchase price. There is, however, a serious legal obstacle to such sale, rendering it impossible for CDB to perform its obligation as
seller to deliver and transfer ownership of the property. Acctmis

3
Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not have. In applying this precept to a contract of sale, a
distinction must be kept in mind between the "perfection" and "consummation" stages of the contract.

A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.[10] It is,
therefore, not required that, at the perfection stage, the seller be the owner of the thing sold or even that such subject matter of the sale exists at that
point in time.[11] Thus, under Art. 1434 of the Civil Code, when a person sells or alienates a thing which, at that time, was not his, but later acquires
title thereto, such title passes by operation of law to the buyer or grantee. This is the same principle behind the sale of "future goods" under Art. 1462
of the Civil Code. However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is required that the seller be the owner of the
thing sold. Otherwise, he will not be able to comply with his obligation to transfer ownership to the buyer. It is at the consummation stage where the
principle of nemo dat quod non habet applies.

In Dignos v. Court of Appeals,[12] the subject contract of sale was held void as the sellers of the subject land were no longer the owners of the same
because of a prior sale.[13] Again, in Nool v. Court of Appeals,[14] we ruled that a contract of repurchase, in which the seller does not have any title to
the property sold, is invalid:

We cannot sustain petitioners view. Article 1370 of the Civil Code is applicable only to valid and enforceable contracts. The
Regional Trial Court and the Court of Appeals ruled that the principal contract of sale contained in Exhibit C and the auxiliary
contract of repurchase in Exhibit D are both void. This conclusion of the two lower courts appears to find support in Dignos v.
Court of Appeals, where the Court held:

"Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer
owners of the same and the sale is null and void."

In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since Exhibit D, the
alleged contract of repurchase, was dependent on the validity of Exhibit C, it is itself void. A void contract cannot give rise to a
valid one. Verily, Article 1422 of the Civil Code provides that (a) contract which is the direct result of a previous illegal contract,
is also void and inexistent."

We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where the sellers "were no longer
the owners" of the property. Such a situation (where the sellers were no longer owners) does not appear to be one of the void
contracts enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code itself recognizes a sale where the goods are to
be acquired x x x by the seller after the perfection of the contract of sale, clearly implying that a sale is possible even if the seller
was not the owner at the time of sale, provided he acquires title to the property later on. Misact

In the present case, however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyers, as the
buyers themselves have already acquired title and delivery thereof from the rightful owner, the DBP. Thus, such contract may be
deemed to be inoperative and may thus fall, by analogy, under item No. 5 of Article 1409 of the Civil Code: Those which
contemplate an impossible service. Article 1459 of the Civil Code provides that "the vendor must have a right to transfer the
ownership thereof [subject of the sale] at the time it is delivered." Here, delivery of ownership is no longer possible. It has become
impossible.[15]

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore, be deemed a nullity for CDB did not
have a valid title to the said property. To be sure, CDB never acquired a valid title to the property because the foreclosure sale, by virtue of which the
property had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property foreclosed.

A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor in
default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the
bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is
the reason Art. 2085[16] of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things,
that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the
mortgagor default in the payment of the loan.

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the
mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in good
faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go
beyond what appears on the face of the title.[17] The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the
certificate of title. Sdjad

This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make a detailed investigation of the history of the title
of the property given as security before accepting a mortgage.

We are not convinced, however, that under the circumstances of this case, CDB can be considered a mortgagee in good faith. While petitioners are not
expected to conduct an exhaustive investigation on the history of the mortgagors title, they cannot be excused from the duty of exercising the due
diligence required of banking institutions. In Tomas v. Tomas,[18] we noted that it is standard practice for banks, before approving a loan, to send
representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof, noting that banks are expected to
exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected with
public interest. We held thus:

We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the innocent original registered owner who
obtained his certificate of title through perfectly legal and regular proceedings, than one who obtains his certificate from a totally
void one, as to prevail over judicial pronouncements to the effect that one dealing with a registered land, such as a purchaser, is
under no obligation to look beyond the certificate of title of the vendor, for in the latter case, good faith has yet to be established
by the vendee or transferee, being the most essential condition, coupled with valuable consideration, to entitle him to respect for
his newly acquired title even as against the holder of an earlier and perfectly valid title. There might be circumstances apparent on
the face of the certificate of title which could excite suspicion as to prompt inquiry, such as when the transfer is not by virtue of a
4
 voluntary act of the original registered owner, as in the instant case, where it was by means of a self-executed deed of extra-judicial
settlement, a fact which should be noted on the face of Eusebia Tomas certificate of title. Failing to make such inquiry would hardly
be consistent with any pretense of good faith, which the appellant bank invokes to claim the right to be protected as a mortgagee,
and for the reversal of the judgment rendered against it by the lower court.[19]

In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo Guansings title. It appears that Rodolfo
Guansing obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he and Perfecto
Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his rights thereto. This self-executed deed should have
placed CDB on guard against any possible defect in or question as to the mortgagors title. Moreover, the alleged ocular inspection report[20] by CDBs
representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that the subject land was being occupied by persons
other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto Guansing, contest the title of Rodolfo. [21] Sppedsc

II.

The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties was at fault for the nullity of the contract. Both the
trial court and the appellate court found petitioners guilty of fraud, because on June 16, 1988, when Lim was asked by CDB to pay the 10% option
money, CDB already knew that it was no longer the owner of the said property, its title having been cancelled. [22] Petitioners contend that: (1) such
finding of the appellate court is founded entirely on speculation and conjecture; (2) neither CDB nor FEBTC was a party in the case where the
mortgagors title was cancelled; (3) CDB is not privy to any problem among the Guansings; and (4) the final decision cancelling the mortgagors title
was not annotated in the latters title.

As a rule, only questions of law may be raised in a petition for review, except in circumstances where questions of fact may be properly raised.[23] Here,
while petitioners raise these factual issues, they have not sufficiently shown that the instant case falls under any of the exceptions to the above rule. We
are thus bound by the findings of fact of the appellate court. In any case, we are convinced of petitioners negligence in approving the mortgage
application of Rodolfo Guansing.

III.

We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of the Civil Code provides:

If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be
observed:

....

(2).......When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to comply with his promise.

Private respondents are thus entitled to recover the P30,000.00 option money paid by them. Moreover, since the filing of the action for damages against
petitioners amounted to a demand by respondents for the return of their money, interest thereon at the legal rate should be computed from August 29,
1989, the date of filing of Civil Case No. Q-89-2863, not June 17, 1988, when petitioners accepted the payment. This is in accord with our ruling
in Castillo v. Abalayan[24] that in case of a void sale, the seller has no right whatsoever to keep the money paid by virtue thereof and should refund it,
with interest at the legal rate, computed from the date of filing of the complaint until fully paid. Indeed, Art. 1412(2) which provides that the non-guilty
party "may demand the return of what he has given" clearly implies that without such prior demand, the obligation to return what was given does not
become legally demandable. Sccalr

Considering CDBs negligence, we sustain the award of moral damages on the basis of Arts. 21 and 2219 of the Civil Code and our ruling in Tan v.
Court of Appeals[25] that moral damages may be recovered even if a banks negligence is not attended with malice and bad faith. We find, however, that
the sum of P250,000.00 awarded by the trial court is excessive. Moral damages are only intended to alleviate the moral suffering undergone by private
respondents, not to enrich them at the expense of the petitioners. [26] Accordingly, the award of moral damages must be reduced to P50,000.00.

Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the Civil Code, is excessive and should be reduced to
P30,000.00. The award of P30,000.00 attorneys fees based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should similarly be reduced to P20,000.00.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to the award of damages as above stated.

SO ORDERED.2/29/00 2:19 PM

[G.R. No. 125055. October 30, 1998]

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and SPOUSES ROMULO S.A.
JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court of Appeals[1] reversing, in toto, the decision
of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well as the appellate courts resolution of May 7, 1996 denying reconsideration.

5
 Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private respondents, the spouses Romulo and
Erlinda Javillonar, in consideration of which the latter executed the following documents: (a) a promissory note, dated November 27, 1991, stating an
interest charge of 4% per month for six months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with the improvements thereon;
and (c) an undated deed of sale of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. [2]
The interest on the said loan was to be paid in four installments: half of the total amount agreed upon (P900,000.00) to be paid in advance through
a deduction from the proceeds of the loan, while the balance to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992.
The promissory note expressly provided that upon failure of the MORTGAGOR [private respondents] to pay the interest without prior arrangement
with the MORTGAGEE [petitioner], full possession of the property will be transferred and the deed of sale will be registered.[3] For this purpose, the
owners duplicate of TCT No. 58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered the sale of the land in its favor on February
21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco Realty.[4]
Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13, 1992 for which they signed a
promissory note which reads:

PROMISSORY NOTE

For value received, I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, the additional sum of Two Million Five
Hundred Thousand Pesos (P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent (4%) a month until fully paid and if after
the said date this note and/or the other promissory note of P7.5 Million remains unpaid and/or unsettled, without any need for prior demand or
notification, I promise to vacate voluntarily and willfully and/or allow A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION to
appropriate and occupy for their exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila.[5]

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from May 1992, plus surcharges. As respondent
spouses refused to vacate, petitioner filed the present action for possession before the Regional Trial Court in Pasig City. [6]
In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the realty as the undated deed of sale was
executed by them merely as an additional security for the payment of their loan. Furthermore, they claimed that they were not notified of the registration
of the sale in favor of petitioner A. Francisco Realty and that there was no interest then unpaid as they had in fact been paying interest even subsequent
to the registration of the sale. As an alternative defense, respondents contended that the complaint was actually for ejectment and, therefore, the
Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No. PT-85569 as secured by
petitioner and the issuance of a new title evidencing their ownership of the property. [7]
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered declaring as legal and valid, the right of ownership of A.
Francisco Realty And Development Corporation, over the property subject of this case and now registered in its name as owner thereof, under TCT
No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further committing acts of dispossession or from withholding possession from
plaintiff, of the said property as herein described and specified.

Claim for damages in all its forms, however, including attorneys fees, are hereby denied, no competent proofs having been adduced on record, in
support thereof.[8]

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and dismissed the complaint against them.
The appellate court ruled that the Regional Trial Court had no jurisdiction over the case because it was actually an action for unlawful detainer which
is exclusively cognizable by municipal trial courts. Furthermore, it ruled that, even presuming jurisdiction of the trial court, the deed of sale was void for
being in fact a pactum commissorium which is prohibited by Art. 2088 of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the motion in its resolution, dated May 7, 1996.
Hence, this petition for review on certiorari raising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT HAD NO JURISDICTION
OVER THE COMPLAINT FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL DOCUMENTS SUBJECT OF THE
INSTANT CASE ARE CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF THE
PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contra-distinguished from accion publiciana. As contemplated
by Rule 70 of the Rules of Court, an action for unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or Municipal Trial
Courts, is defined as withholding from by a person from another for not more than one year, the possession of the land or building to which the latter
is entitled after the expiration or termination of the supposed rights to hold possession by virtue of a contract, express or implied. (Tenorio vs. Gamboa,
81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or unlawful detainer within the expiration of the 1 year period,
the case may still be filed under the plenary action to recover possession by accion publiciana before the Court of First Instance (now the Regional
Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language, the case at bar is a legitimate ejectment case filed within the 1 year period from
the jurisdictional demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg. 129
Municipal Trial Courts are vested with the exclusive original jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek Marketing Corp.
vs. CA, 212 SCRA 154 [1990])[9]

6
 We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a possessory action (accion publiciana) and
from a reivindicatory action (accion reivindicatoria) is that the first is limited to the question of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an ejectment suit that may be filed to recover possession
of real property. Aside from the summary action of ejectment, accion publiciana or the plenary action to recover the right of possession and accion
reivindicatoria or the action to recover ownership which includes recovery of possession, make up the three kinds of actions to judicially recover
possession.

Illegal detainer consists in withholding by a person from another of the possession of a land or building to which the latter is entitled after the expiration
or termination of the formers right to hold possession by virtue of a contract, express or implied. An ejectment suit is brought before the proper inferior
court to recover physical possession only or possession de facto and not possession de jure, where dispossession has lasted for not more than one
year. Forcible entry and unlawful detainer are quieting processes and the one-year time bar to the suit is in pursuance of the summary nature of the
action. The use of summary procedure in ejectment cases is intended to provide an expeditious means of protecting actual possession or right to
possession of the property. They are not processes to determine the actual title to an estate. If at all, inferior courts are empowered to rule on the question
of ownership raised by the defendant in such suits, only to resolve the issue of possession. Its determination on the ownership issue is, however, not
conclusive.[10]

The allegations in both the original and the amended complaints of petitioner before the trial court clearly raise issues involving more than the
question of possession, to wit: (a) the validity of the transfer of ownership to petitioner; (b) the alleged new liability of private respondents
for P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the alleged continuing liability of private respondents
under both loans to pay interest and surcharges on such. As petitioner A. Francisco Realty alleged in its amended complaint:
5. To secure the payment of the sum of P7.5 Million together with the monthly interest, the defendant spouses agreed to execute a Deed of
Mortgage over the property with the express condition that if and when they fail to pay monthly interest or any infringement thereof they
agreed to convert the mortgage into a Deed of Absolute Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is
hereto attached and incorporated herein as Annex A;
6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer to the plaintiff, defendant delivered unto
the plaintiff the said Deed of Sale together with the original owners copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal,
copy of which is hereto attached and made an integral part herein as Annex B;
7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with the same condition as aforementioned
with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of the parties, plaintiff recorded and registered
the Absolute Deed of Sale in its favor on and was issued Transfer Certificate of Title No. PT-85569, copy of which is hereto attached
and incorporated herein as Annex C;
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the plaintiff, copy of which is hereto attached and
incorporated herein as Annex C, plaintiff demanded the surrender of the possession of the above-described parcel of land together with the
improvements thereon, but defendants failed and refused to surrender the same to the plaintiff without justifiable reasons thereto; Neither
did the defendants pay the interest of 4% a month from May, 1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants shall fail to pay the interest due and that the Deed of Sale
be registered in favor of plaintiff, the defendants shall pay a monthly rental of P400,000.00 a month until they vacate the premises, and
that if they still fail to pay as they are still failing to pay the amount of P400,000.00 a month as rentals and/or interest, the plaintiff shall
take physical possession of the said property;[11]
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved more than a simple claim for the immediate
possession of the subject property. Such issues range across the full scope of rights of the respective parties under their contractual arrangements. As
held in an analogous case:

The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy, Bulacan extended far beyond the issues generally involved
in unlawful detainer suits. The litigants therein did not raise merely the question of who among them was entitled to the possession of the fishpond of
Federico Suntay. For all judicial purposes, they likewise prayed of the court to rule on their respective rights under the various contractual
documents their respective deeds of lease, the deed of assignment and the promissory note upon which they predicate their claims to the possession of
the said fishpond. In other words, they gave the court no alternative but to rule on the validity or nullity of the above documents. Clearly, the case was
converted into the determination of the nature of the proceedings from a mere detainer suit to one that is incapable of pecuniary estimation and thus
beyond the legitimate authority of the Justice of the Peace Court to rule on. [12]

Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title of petitioner A. Francisco Realty was merely
a collateral attack which would bar a ruling here on the validity of the said title.

A counterclaim is considered a complaint, only this time, it is the original defendant who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502
(1986). It stands on the same footing and is to be tested by the same rules as if it were an independent action. Hence, the same rules on jurisdiction in
an independent action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajax International, Inc. v. 22 SCRA 996 (1968); Javier
v. Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). [13]

On the second issue, the Court of Appeals held that, even on the assumption that the trial court has jurisdiction over the instant case, petitioners
action could not succeed because the deed of sale on which it was based was void, being in the nature of a pactum commissorium prohibited by Art.
2088 of the Civil Code which provides:

ART. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or dispose of them. Any stipulation to the contrary is null
and void.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies, however, that the promissory notes contain
a pactum commissorium. It contends that

7
What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of mortgage providing for the automatic conveyance
of the mortgaged property in case of the failure of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A pactum
commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of Appeals, 112 SCRA 641;
Report of the Code Commission, 156).

Thus, before Article 2088 can find application herein, the subject deed of mortgage must be scrutinized to determine if it contains such a provision
giving the creditor the right to appropriate the things given by way of mortgage without following the procedure prescribed by law for the foreclosure
of the mortgage (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE
DEED ITSELF.[14]

The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court,[15] which involved the violation of a constructive trust, no deed of mortgage was expressly executed
between the parties in that case. Nevertheless, this Court ruled that an agreement whereby property held in trust was ceded to the trustee upon failure
of the beneficiary to pay his debt to the former as secured by the said property was void for being a pactum commissorium. It was there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him (respondent) x x x in case petitioner fails
to reimburse Valdes, must then be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For,
there was to be automatic appropriation of the property by Valdez in the event of failure of petitioner to pay the value of the advances. Thus, contrary
to respondents manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties;
the property was used as security for the loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner.[16]

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be pacto de retro sales but found actually to be
equitable mortgages.

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil Code is sufficient to declare
a contract of sale with right to repurchase an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous effects that
accompany them are not favored. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall be vested on the vendee
should the vendors fail to redeem the property on the specified date. Such stipulation that the ownership of the property would automatically pass to
the vendee in case no redemption was effected within the stipulated period is void for being a pactum commissorium which enables the mortgagee to
acquire ownership of the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage rather
that to sell the property.[17]

Indeed, in Reyes v. Sierra[18] this Court categorically ruled that a mortgagees mere act of registering the mortgaged property in his own name
upon the mortgagors failure to redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.

Obviously, from the nature of the transaction, applicants predecessor-in-interest is a mere mortgagee, and ownership of the thing mortgaged is retained
by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the mortgage document evidencing the loan was
nonregistrable being a purely private instrument. Failure of mortgagor to redeem the property does not automatically vest ownership of the property to
the mortgagee, which would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of
the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them. Any stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagors failure to redeem the property would amount to a pactum
commissorium which is against good morals and public policy.[19]

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent spouses to pay interest, ownership of
the property would be automatically transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance
a pactum commissorium. They embody the two elements of pactum commissorium as laid down in Uy Tong v. Court of Appeals,[20] to wit:

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or dispose of the same. Any stipulation to the contrary is
null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an
automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated
period.[21]

The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A. Francisco Realty was able to obtain TCT
No. PT-85569 covering the subject lot, must also be declared void, as prayed for by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioners complaint against respondent spouses
on the ground that the stipulations in the promissory notes are void for being a pactum commissorium, but REVERSED insofar as it ruled that the trial
court had no jurisdiction over this case. The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner
and ISSUE a new one in the name of respondent spouses.
SO ORDERED.

G.R. No. L-31018 November 6, 1929

8
CORNELIO CRUZ and CIRIACA SERRANO, plaintiffs-appellants,
vs.
CHUA A. H. LEE, defendant-appellant.

Gibbs and McDonough for plaintiff-appellants.

Antonio Gonzalez for defendant-appellant.

STREET, J.:

This action was instituted in the Court of First Instance of the City of Manila by Cornelio Cruz and wife, for the purpose of recovering a sum of money
from the defendant Chua A.H. Lee, representing the damages alleged to have been sustained by them from the lapsing of certain pawn tickets which
they had pledged to the defendant under the circumstances hereinafter stated. Upon hearing the cause the trial court gave judgment in favor of the
plaintiffs to recover of the defendant the sum of P1,141, with legal interest from December 16, 1927, and with costs. From this judgment both plaintiffs
and defendant appealed.

It appears that prior to June 10, 1926, the plaintiff Cornelio Cruz had pledged valuable jewelry to two different pawnshops in the city of Manila, namely,
the Monte de Piedad and Ildefonso Tambunting, receiving therefor twelve pawn tickets showing the terms upon which the articles pledged were held
by the pledges. On the date stated the plaintiff, being desirous of obtaining a further loan upon the same and other jewels, presented himself to the
defendant Chua A.H Lee and pledged to him six pawn tickets of the Monte de Piedad and a bracelet and the six tickets Lee delivered to the plaintiff a
sum of money, for which the plaintiff executed a receipt containing words to the effect that the amount of P3,020, therein stated, represented the value
of the bracelet and pawn tickets and that it was understood that Lee would become the absolute owner of the articles pledge if Cruz should not return
said sum of money within the period of sixty days. One week thereafter Cruz again presented himself at the place of business of Lee and received the
further sum of P3,500, at the same time delivering two pawn tickets of the house of Ildefonso Tambunting and four pawn tickets of the Monte de
Piedad. At the same time Cruz signed a further receipt containing a stipulation that the sale of the articles pledge would become absolute unless the
amount stated in the receipt should be return within sixty days.

The tickets which form the principal feature in these two pledges represented a pair of diamond earrings previously pledged to Ildefonso Tambunting
for P7,000, and several other pieces of jewelry priviously pledged to the Monte de Piedad for the aggregate amount of P2,020. All of these tickets were
renewable, according to the custom of pawnbrokers, upon payment from time to time of the sums of money representing the interest accruing upon the
debts for which the jewelry was pawned.

The right of repurchasing the jewelry, which was conceded to Cruz in the two receipt above mentioned, was never exercised by him; and on September
25, 1926, Lee filed a complaint against Cruz in the Court of First Instance of Manila (case No. 30569), in which it was allege that the receipts above
mentioned had been drawn in the form of a sale with stipulation for repurchase in sixty days but it was understood between the parties that the transaction
was a loan and that the jewelry and pawn tickets held by Lee constituted a mere security for the money advanced by him to Cruz. As a consequence
Lee asked for judgment against Cruz in the amount of P6,520. On March 31, 1927, judgment in said action was rendered in the Court of First Instance
favorably to the plaintiff and, although an attempt was made to get the decision reviewed in the Supreme Court, the judgment was affirmed for failure
of the appellants to cause a transcript of the oral testimony to be brought to said court. 1 After affirmance of the judgment in the Supreme Court the
cause was returned to the Court of First Instance for execution, but as a result of certain proceedings not necessary to be here recounted, execution in
that case was suspended to wait the result of the judgment to be given in this case.

It appears that the defendant Lee on August 18, 1926, renewed the ten pawn tickets issued by the Monte de Piedad by paying the interest necessary to
effect the renewal, but these tickets all expired on October 18, 1926, and were never renewed. The pawn tickets issued by the Tambunting's pawnshop
on the diamond earrings were dated May 12, 1926, and remained good for one year, having expired on May 12, 1927. Although the pawn tickets issued
by the Monte de Piedad expired on October 18, 1926, it is admitted that they could have been renewed or the jewelry redeemed at any time prior to
actual sale at public auction, and these jewels were not sold by the Monte de Piedad until in the year 1927, when they were, at different dates, brought
in by the appraiser of the Monte de Piedad for the amount then due upon the respective jewels. But the jewelry represented by one of these pawn tickets
was that thus not sold until August 10, 1928. From this it will be seen that all of the pawned jewelry was still subject to redemption when civil case
No. 30569 was first called for trial on January 3, 1927, and apparently the right of redemption on only one piece of jewelry had been foreclosed by sale
when the decision was rendered in the same case at the end of March. The record does not show whether or not the earrings pawned to Ildefonso
Tambunting were in fact sold after the tickets lapsed on May 12, 1927, but it is proved that the jewelry was not forthcoming when a inquiry was made
therefor by the present plaintiff with a view to redemption after judgment had been rendered in the instituted by Lee against him.

The first two errors assigned in the brief of the defendant as appellant raise a question of a preliminary nature, which is, whether the present action can
be maintained in view of the fact that the cause of action set out in the present complaint might have been — so the defendant supposes — used as a
ground of defense or counterclaim in action No. 30569 of the Court of First Instance of Manila instituted by the present defendant against the present
plaintiff. Upon this it is insisted that the trial court should sustained the plea of res judicata interposed in this case by the defendant. This contention is
untenable for the reason that the facts which serve as the basis of the present action were not existence at the time of commencement of action No.
30569. Under section 97 of the Code of Civil Procedure the defendant is required to set up his counterclaim as a defense only in those cases where the
right out of which the counterclaim arises existed at the time of the commencement of the action.

The principal question requiring decision in the case before us is one of law, namely, whether a person who takes a pawn tickets in pledge is bound to
renew the ticket from time to time, by the payment of interest, or premium, as required by the pawnbroker, until the rights of the pledgor are finally
foreclosed. In this connection reliance is placed by the attorney for the plaintiff upon article 1867 of the Civil Code, which reads as follows:

The creditor must take care of the thing given in pledge with the diligence of a good father of a family; he shall be entitled to recover any
expenses incurred for its preservation and shall be liable for its loss or deterioration, in accordance with the provisions of this code.

In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property
in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results
that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive.
Article 1867 contemplates that the pledgee may have to undergo expenses in order to prevent the pledge from being lost; and this expenses the pledgee
is entitled to recover from the pledgor. From this it follows that were, in a case like this, the pledge is lost by the failure of the pledgee to renew the
loan, he is liable for the resulting damage. Nor, in this case, was the duty of the pledgee destroyed by the fact that the pledgee had obtained a judgment
for the debt of the pledgor which was secured by the pledge. The duty to use the deligence of a good father of the family in caring for the pledge subsists
as long as the pledge article remains in the power of the pledgee.

9
In this connection we quote as follows from a monographic note appended to Griggs vs. Day (32 Am. St. Rep., 718), in which it is said:

As the holder of collateral security is entitled to its possession and to the extent of his interest is substantially the owner thereof, he must, to
a certain extent at least, assume the duties of the ownership, and furthermore must protect the interest of his pledgor as well as his own,
because the latter, by giving the collateral security, has parted with the power to protect himself. The contract carries with it the implication
that the security shall be made available to discharge the obligation': Wheeler vs. Newbould, 16 N.Y., 396. We apprehend that it carries with
it the further implication that the property, no matter what its character, shall be lost through the negligence or inattention of the pledgee.

In commenting upon article 1867 of the Civil Code, the commentator Manresa points out that the predecessor article in the Civil Code of 1851 limited
itself to declaring that the creditor should take such care of the pledge thing as the good father of the family, and this led to a lively controversy among
the civilians concerning the consequences of the duty of conservation or safekeeping imposed upon the creditor. But this controversy, says the learned
author, has largely lost its interest because the authors of the Code put an end to such discussions by defining the responsibility of the creditor in a form
so clear and explicit as to leave no room for doubt (Manresa, Codigo Civil. 4426, 427). In the treatise of Colin and Capitant on the Civil Law, it is
stated that the creditor who receives an article in pledge must bear all the expenses necessary to secure the conservation of the pledge and that the
debtor is bound to reimburse him for such expenses. As an illustration of the duty of the pledgee to exercise diligence in preserving the pledge, he states
that a pledgee who fails to renew at the proper time the inscription of a mortgage guaranteeing a credit will be liable for the damage resulting from its
loss (opus citat, p. 77). To the same effect is a passage found in the pages of the French commentator Troplong, Droit Civil Explique, Du Gage, sec.
428.

The question of the extent of the duty of the pledgee in caring for the property pledged has often been discussed in connection with pledges of collatteral
security. In this case we find the following observation made by the author of the title "Pledge" in 21 Ruling Case Law, to wit:

The rights and duties of parties to a pledge of securities for the payment of the debt may of course be fixed by agreement as to the manner in
which they are to be collected, but as a general rule not only is it the right of the holder of collateral security to collect the money thereon and
apply it to the principal debt but his duties in this respect are active and he is bound to ordinary diligence to preserve the legal validity and
pecuniary value of the pledge, and if by negligence, wrongful act or omission on his part loss is sustained, it must be borne by him. (Pledge,
sec. 30.)1awphil.net

The application of the doctrine above expounded to the case in hand leads the conclusion that the defendant Chua A. H. Lee in the case before us in
liable for the value of the securities lost by his failure to keep the pledges alive in the extent of their actual value over the amounts for which the same
were pledged; and the trial court, in our opinion, committed no error is so holding.

There remains to be considered the question of the proper valuation of the jewelry sacrificed in the manner above stated. Upon this point we are of the
opinion that the trial court was too conservative in its estimate; and we find, upon the testimony of Manuel Javier, appraiser of the La Insular Pawnshop,
and Francisco Ferrer, a jewelry merchant of Manila supplemented by that of the plaintiff, Cornelio Cruz, that the two diamond earrings represented by
the tickets issued by Tambunting's pawnshop were fairly worth P14,000. It is true that Cornelio Cruz testified that these jewels cost him P11,000, but
he at the same time stated that they were at the time of the trial in the court below worth at least P15,000. Again, we are of the opinion that the jewels
represented by the ten pawn tickets of Monte de Piedad were worth, at a conservation estimate, the sum of P4,040. In fixing these values it must be
remembered that it is not the practice of pawnshops to advance more than from thirty-five to fifty per cent of the true value upon pledges of jewels.

From the values of the jewelry, as estimated above, there is of course to be deducted the amounts which had been advanced upon the pledges with
interest thereon at the situated rate of 18 per cent per annum until the date when the offer was made by the plaintiff Cornelio Cruz in writing to redeem
the jewelry. But it should be noted that the sum of P3,500 which the defendant advanced to Cruz upon the pledge of the pawn tickets covering the
earings must not be deducted, because the defendant, in the prior action, has already recovered judgment for that amount.

Upon liquidation of the account between plaintiffs and defendant in conformity with the suggestion above made, it results that the plaintiffs herein
were damaged by the sacrifice of the jewelry in question in the total amount of P6,687.56. Also, in order to clarify the appealed decision, it is declared
that the plaintiff is entitled to recover the bracelet composed of seventeen diamonds, forming the additional pledge made by the plaintiff to the defendant,
upon satisfaction of the judgment in civil case No. 30569.

The judgment appealed from is therefore modified to the extent above indicated, namely, that the plaintiffs shall recover of the defendant the sum of
P6,687.56, with legal interest from December 16, 1927, until the same shall be paid, as well as the bracelet of seventeen diamonds upon satisfaction of
the judgment above mentioned. So ordered, without costs.

Avanceña, C.J., Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-21069 October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,

vs.
RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee.

Rodolfo R. Velayo for and in his own behalf as defendant-appellant.

REYES, J.B.L., J.:

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo Velayo to pay appellee
Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-½% per annum from July 13, 1954; P120.93 as premiums with interest at
the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution
of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to
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pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall
or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection",
with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the
proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting
legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety
company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged
jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company
brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part
under Article 2115 of the 1950 Civil Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall
not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance, the defense was once
more overruled, and the case decided in the terms set down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the
defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was no understanding that, should the same
be sold at public auction and the value thereof should be short of the undertaking, the defendant would have no further liability to the plaintiff.
On the contrary, the last portion of the said agreement specifies that in case the said collateral should diminish in value, the plaintiff may
demand additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of the
pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a
deficiency judgment for the balance should the collateral not command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been sold for only the
amount of P235.00, the liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or
P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory character is of the essence of pledge
and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the
fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made
on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the
application of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from stipulation. This is incorrect,
because Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law
that the parties cannot override:

If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal
obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the
same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in installments, and
which originated in Act 4110 promulgated by the Philippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as to his liability for the 1954 premium
in the sum of P120.93, and interest at 12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So
ordered.

Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

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