Professional Documents
Culture Documents
Case Digest 2
Case Digest 2
LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge Philippines, Inc.), LUZON CONTINENTAL LAND CORPORATION,
CONTINENTAL OPERATING CORPORATION and PHILIP ROSEBERG, Petitioners, v. CONTINENTAL CEMENT CORPORATION,
GREGORY T. LIM and ANTHONY A. MARIANO, Respondents.
DECISION
PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims persons who were not parties to the original complaints? This is the
main question to be answered in this controversy.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the May 22, 20022 and the September
3, 2002 Orders3 of the Regional Trial Court (RTC) of Quezon City (Branch 80) in Civil Case No. Q-00-41103. The decretal portion
of the first assailed Order reads:
"WHEREFORE, in the light of the foregoing as earlier stated, the plaintiff's motion to dismiss claims is granted. Accordingly, the
defendants' claims against Mr. Lim and Mr. Mariano captioned as their counterclaims are dismissed."4
The Facts
Briefly, the origins of the present controversy can be traced to the Letter of Intent (LOI) executed by both parties on August 11,
1998, whereby Petitioner Lafarge Cement Philippines, Inc. (Lafarge) - - on behalf of its affiliates and other qualified entities,
including Petitioner Luzon Continental Land Corporation (LCLC) - - agreed to purchase the cement business of Respondent
Continental Cement Corporation (CCC). On October 21, 1998, both parties entered into a Sale and Purchase Agreement (SPA). At
the time of the foregoing transactions, petitioners were well aware that CCC had a case pending with the Supreme Court. The
case was docketed as GR No. 119712, entitled Asset Privatization Trust (APT) v. Court of Appeals and Continental Cement
Corporation.
In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties, under Clause 2 (c) of the SPA,
allegedly agreed to retain from the purchase price a portion of the contract price in the amount of P117,020,846.84 - - the
equivalent of US$2,799,140. This amount was to be deposited in an interest-bearing account in the First National City Bank of
New York (Citibank) for payment to APT, the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the payment to APT, despite the subsequent finality of the Decision
in GR No. 119712 in favor of the latter and the repeated instructions of Respondent CCC. Fearful that nonpayment to APT would
result in the foreclosure, not just of its properties covered by the SPA with Lafarge but of several other properties as well, CCC
filed before the Regional Trial Court of Quezon City on June 20, 2000, a "Complaint with Application for Preliminary Attachment"
against petitioners. Docketed as Civil Case No. Q-00-41103, the Complaint prayed, among others, that petitioners be directed to
pay the "APT Retained Amount" referred to in Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on forum-shopping. Respondent CCC
had allegedly made the same claim it was raising in Civil Case No. Q-00-41103 in another action, which involved the same parties
and which was filed earlier before the International Chamber of Commerce. After the trial court denied the Motion to Dismiss in
its November 14, 2000 Order, petitioners elevated the matter before the Court of Appeals in CA-GR SP No. 68688.
In the meantime, to avoid being in default and without prejudice to the outcome of their appeal, petitioners filed their Answer
and Compulsory Counterclaims ad Cautelam before the trial court in Civil Case No. Q-00-41103. In their Answer, they denied the
allegations in the Complaint. They prayed - - by way of compulsory counterclaims against Respondent CCC, its majority
stockholder and president Gregory T. Lim, and its corporate secretary Anthony A. Mariano - - for the sums of (a) P2,700,000 each
as actual damages, (b) P100,000,000 each as exemplary damages, (c) P100,000,000 each as moral damages, and (d) P5,000,000
each as attorney's fees plus costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had filed the "baseless" Complaint in Civil Case No. Q-00-41103 and
procured the Writ of Attachment in bad faith. Relying on this Court's pronouncement in Sapugay v. CA,5 petitioners prayed that
both Lim and Mariano be held "jointly and solidarily" liable with Respondent CCC.
On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved to dismiss petitioners' compulsory
counterclaims on grounds that essentially constituted the very issues for resolution in the instant Petition.
On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80) dismissed petitioners' counterclaims for several reasons,
among which were the following: a) the counterclaims against Respondents Lim and Mariano were not compulsory; b) the ruling
in Sapugay was not applicable; and c) petitioners' Answer with Counterclaims violated procedural rules on the proper joinder of
causes of action.6
Acting on the Motion for Reconsideration filed by petitioners, the trial court - - in an Amended Order dated September 3, 20027
- - admitted some errors in its May 22, 2002 Order, particularly in its pronouncement that their counterclaim had been pleaded
against Lim and Mariano only. However, the RTC clarified that it was dismissing the counterclaim insofar as it impleaded
Respondents Lim and Mariano, even if it included CCC.
Issues
In their Memorandum, petitioners raise the following issues for our consideration:
"[a] Whether or not the RTC gravely erred in refusing to rule that Respondent CCC has no personality to move to dismiss
petitioners' compulsory counterclaims on Respondents Lim and Mariano's behalf.
"[b] Whether or not the RTC gravely erred in ruling that (i) petitioners' counterclaims against Respondents Lim and Mariano are
not compulsory; (ii) Sapugay v. Court of Appeals is inapplicable here; and (iii) petitioners violated the rule on joinder of causes of
action."9
For clarity and coherence, the Court will resolve the foregoing in reverse order.
First Issue:
Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil Procedure as "any claim which a defending party may have
against an opposing party." They are generally allowed in order to avoid a multiplicity of suits and to facilitate the disposition of
the whole controversy in a single action, such that the defendant's demand may be adjudged by a counterclaim rather than by
an independent suit. The only limitations to this principle are (1) that the court should have jurisdiction over the subject matter
of the counterclaim, and (2) that it could acquire jurisdiction over third parties whose presence is essential for its adjudication.10
A counterclaim may either be permissive or compulsory. It is permissive "if it does not arise out of or is not necessarily
connected with the subject matter of the opposing party's claim."11 A permissive counterclaim is essentially an independent
claim that may be filed separately in another case.
A counterclaim is compulsory when its object "arises out of or is necessarily connected with the transaction or occurrence
constituting the subject matter of the opposing party's claim and does not require for its adjudication the presence of third
parties of whom the court cannot acquire jurisdiction."12
Unlike permissive counterclaims, compulsory counterclaims should be set up in the same action; otherwise, they would be
barred forever. NAMARCO v. Federation of United Namarco Distributors13 laid down the following criteria to determine
whether a counterclaim is compulsory or permissive: 1) Are issues of fact and law raised by the claim and by the counterclaim
largely the same? 2) Would res judicata bar a subsequent suit on defendant's claim, absent the compulsory counterclaim rule?
3) Will substantially the same evidence support or refute plaintiff's claim as well as defendant's counterclaim? 4) Is there any
logical relation between the claim and the counterclaim? A positive answer to all four questions would indicate that the
counterclaim is compulsory.
Adopted in Quintanilla v. CA14 and reiterated in Alday v. FGU Insurance Corporation,15 the "compelling test of compulsoriness"
characterizes a counterclaim as compulsory if there should exist a "logical relationship" between the main claim and the
counterclaim. There exists such a relationship when conducting separate trials of the respective claims of the parties would
entail substantial duplication of time and effort by the parties and the court; when the multiple claims involve the same factual
and legal issues; or when the claims are offshoots of the same basic controversy between the parties.
We shall now examine the nature of petitioners' counterclaims against respondents with the use of the foregoing parameters.
"Gregory T. Lim and Anthony A. Mariano were the persons responsible for making the bad faith decisions for, and causing
plaintiff to file this baseless suit and to procure an unwarranted writ of attachment, notwithstanding their knowledge that
plaintiff has no right to bring it or to secure the writ. In taking such bad faith actions, Gregory T. Lim was motivated by his
personal interests as one of the owners of plaintiff while Anthony A. Mariano was motivated by his sense of personal loyalty to
Gregory T. Lim, for which reason he disregarded the fact that plaintiff is without any valid cause.
"Consequently, both Gregory T. Lim and Anthony A. Mariano are the plaintiff's co-joint tortfeasors in the commission of the acts
complained of in this answer and in the compulsory counterclaims pleaded below. As such they should be held jointly and
solidarily liable as plaintiff's co-defendants to those compulsory counterclaims pursuant to the Supreme Court's decision in
Sapugay v. Mobil.
xxxxxxxxx
"The plaintiff's, Gregory T. Lim and Anthony A. Mariano's bad faith filing of this baseless case has compelled the defendants to
engage the services of counsel for a fee and to incur costs of litigation, in amounts to be proved at trial, but in no case less than
P5 million for each of them and for which plaintiff Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily
liable.
"The plaintiff's, Gregory T. Lim's and Anthony A. Mariano's actions have damaged the reputations of the defendants and they
should be held jointly and solidarily liable to them for moral damages of P100 million each.
"In order to serve as an example for the public good and to deter similar baseless, bad faith litigation, the plaintiff, Gregory T.
Lim and Anthony A. Mariano should be held jointly and solidarily liable to the defendants for exemplary damages of P100 million
each." 16
The above allegations show that petitioners' counterclaims for damages were the result of respondents' (Lim and Mariano) act
of filing the Complaint and securing the Writ of Attachment in bad faith. Tiu Po v. Bautista17 involved the issue of whether the
counterclaim that sought moral, actual and exemplary damages and attorney's fees against respondents on account of their
"malicious and unfounded" complaint was compulsory. In that case, we held as follows:
"Petitioners' counterclaim for damages fulfills the necessary requisites of a compulsory counterclaim. They are damages claimed
to have been suffered by petitioners as a consequence of the action filed against them. They have to be pleaded in the same
action; otherwise, petitioners would be precluded by the judgment from invoking the same in an independent action. The
pronouncement in Papa v. Banaag (17 SCRA 1081) (1966) is in point:
"Compensatory, moral and exemplary damages, allegedly suffered by the creditor in consequence of the debtor's action, are
also compulsory counterclaim barred by the dismissal of the debtor's action. They cannot be claimed in a subsequent action by
the creditor against the debtor."
"Aside from the fact that petitioners' counterclaim for damages cannot be the subject of an independent action, it is the same
evidence that sustains petitioners' counterclaim that will refute private respondent's own claim for damages. This is an
additional factor that characterizes petitioners' counterclaim as compulsory."18
Moreover, using the "compelling test of compulsoriness," we find that, clearly, the recovery of petitioners' counterclaims is
contingent upon the case filed by respondents; thus, conducting separate trials thereon will result in a substantial duplication of
the time and effort of the court and the parties.
Since the counterclaim for damages is compulsory, it must be set up in the same action; otherwise, it would be barred forever. If
it is filed concurrently with the main action but in a different proceeding, it would be abated on the ground of litis pendentia; if
filed subsequently, it would meet the same fate on the ground of res judicata.19
The spouses exerted all efforts to secure a bond, but the bonding companies required a copy of the Dealership Agreement,
which respondent continued to withhold from them. Later, petitioners discovered that respondent and its manager, Ricardo P.
Cardenas, had intended all along to award the dealership to Island Air Product Corporation.
In their Answer, petitioners impleaded in the counterclaim Mobil Philippines and its manager - - Ricardo P. Cardenas - - as
defendants. They prayed that judgment be rendered, holding both jointly and severally liable for pre-operation expenses, rental,
storage, guarding fees, and unrealized profit including damages. After both Mobil and Cardenas failed to respond to their
Answer to the Counterclaim, petitioners filed a "Motion to Declare Plaintiff and its Manager Ricardo P. Cardenas in Default on
Defendant's Counterclaim."
Among the issues raised in Sapugay was whether Cardenas, who was not a party to the original action, might nevertheless be
impleaded in the counterclaim. We disposed of this issue as follows:
"A counterclaim is defined as any claim for money or other relief which a defending party may have against an opposing party.
However, the general rule that a defendant cannot by a counterclaim bring into the action any claim against persons other than
the plaintiff admits of an exception under Section 14, Rule 6 which provides that 'when the presence of parties other than those
to the original action is required for the granting of complete relief in the determination of a counterclaim or cross-claim, the
court shall order them to be brought in as defendants, if jurisdiction over them can be obtained.' The inclusion, therefore, of
Cardenas in petitioners' counterclaim is sanctioned by the rules."20
The prerogative of bringing in new parties to the action at any stage before judgment is intended to accord complete relief to all
of them in a single action and to avert a duplicity and even a multiplicity of suits thereby.
In insisting on the inapplicability of Sapugay, respondents argue that new parties cannot be included in a counterclaim, except
when no complete relief can be had. They add that "[i]n the present case, Messrs. Lim and Mariano are not necessary for
petitioners to obtain complete relief from Respondent CCC as plaintiff in the lower court. This is because Respondent CCC as a
corporation with a separate [legal personality] has the juridical capacity to indemnify petitioners even without Messrs. Lim and
Mariano."21
We disagree. The inclusion of a corporate officer or stockholder - - Cardenas in Sapugay or Lim and Mariano in the instant case -
- is not premised on the assumption that the plaintiff corporation does not have the financial ability to answer for damages, such
that it has to share its liability with individual defendants. Rather, such inclusion is based on the allegations of fraud and bad
faith on the part of the corporate officer or stockholder. These allegations may warrant the piercing of the veil of corporate
fiction, so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her
actions.
In Tramat Mercantile v. Court of Appeals,22 the Court held that generally, it should only be the corporation that could properly
be held liable. However, circumstances may warrant the inclusion of the personal liability of a corporate director, trustee, or
officer, if the said individual is found guilty of bad faith or gross negligence in directing corporate affairs.
Remo Jr. v. IAC23 has stressed that while a corporation is an entity separate and distinct from its stockholders, the corporate
fiction may be disregarded if "used to defeat public convenience, justify a wrong, protect fraud, or defend crime." In these
instances, "the law will regard the corporation as an association of persons, or in case of two corporations, will merge them into
one." Thus, there is no debate on whether, in alleging bad faith on the part of Lim and Mariano the counterclaims had in effect
made them "indispensable parties" thereto; based on the alleged facts, both are clearly parties in interest to the
counterclaim.24
Respondents further assert that "Messrs. Lim and Mariano cannot be held personally liable [because their assailed acts] are
within the powers granted to them by the proper board resolutions; therefore, it is not a personal decision but rather that of the
corporation as represented by its board of directors."25 The foregoing assertion, however, is a matter of defense that should be
threshed out during the trial; whether or not "fraud" is extant under the circumstances is an issue that must be established by
convincing evidence.26
Suability and liability are two distinct matters. While the Court does rule that the counterclaims against Respondent CCC's
president and manager may be properly filed, the determination of whether both can in fact be held jointly and severally liable
with respondent corporation is entirely another issue that should be ruled upon by the trial court.
However, while a compulsory counterclaim may implead persons not parties to the original complaint, the general rule - - a
defendant in a compulsory counterclaim need not file any responsive pleading, as it is deemed to have adopted the allegations
in the complaint as its answer - - does not apply. The filing of a responsive pleading is deemed a voluntary submission to the
jurisdiction of the court; a new party impleaded by the plaintiff in a compulsory counterclaim cannot be considered to have
automatically and unknowingly submitted to the jurisdiction of the court. A contrary ruling would result in mischievous
consequences whereby a party may be indiscriminately impleaded as a defendant in a compulsory counterclaim; and judgment
rendered against it without its knowledge, much less participation in the proceedings, in blatant disregard of rudimentary due
process requirements.
The correct procedure in instances such as this is for the trial court, per Section 12 of Rule 6 of the Rules of Court, to "order
[such impleaded parties] to be brought in as defendants, if jurisdiction over them can be obtained," by directing that summons
be served on them. In this manner, they can be properly appraised of and answer the charges against them. Only upon service of
summons can the trial court obtain jurisdiction over them.
In Sapugay, Cardenas was furnished a copy of the Answer with Counterclaim, but he did not file any responsive pleading to the
counterclaim leveled against him. Nevertheless, the Court gave due consideration to certain factual circumstances, particularly
the trial court's treatment of the Complaint as the Answer of Cardenas to the compulsory counterclaim and of his seeming
acquiescence thereto, as evidenced by his failure to make any objection despite his active participation in the proceedings. It
was held thus:
"It is noteworthy that Cardenas did not file a motion to dismiss the counterclaim against him on the ground of lack of
jurisdiction. While it is a settled rule that the issue of jurisdiction may be raised even for the first time on appeal, this does not
obtain in the instant case. Although it was only Mobil which filed an opposition to the motion to declare in default, the fact that
the trial court denied said motion, both as to Mobil and Cardenas on the ground that Mobil's complaint should be considered as
the answer to petitioners' compulsory counterclaim, leads us to the inescapable conclusion that the trial court treated the
opposition as having been filed in behalf of both Mobil and Cardenas and that the latter had adopted as his answer the
allegations raised in the complaint of Mobil. Obviously, it was this ratiocination which led the trial court to deny the motion to
declare Mobil and Cardenas in default. Furthermore, Cardenas was not unaware of said incidents and the proceedings therein as
he testified and was present during trial, not to speak of the fact that as manager of Mobil he would necessarily be interested in
the case and could readily have access to the records and the pleadings filed therein.
"By adopting as his answer the allegations in the complaint which seeks affirmative relief, Cardenas is deemed to have
recognized the jurisdiction of the trial court over his person and submitted thereto. He may not now be heard to repudiate or
question that jurisdiction."27
Such factual circumstances are unavailing in the instant case. The records do not show that Respondents Lim and Mariano are
either aware of the counterclaims filed against them, or that they have actively participated in the proceedings involving them.
Further, in dismissing the counterclaims against the individual respondents, the court a quo - - unlike in Sapugay - - cannot be
said to have treated Respondent CCC's Motion to Dismiss as having been filed on their behalf.
Respondent CCC contends that petitioners' counterclaims violated the rule on joinder of causes of action. It argues that while
the original Complaint was a suit for specific performance based on a contract, the counterclaim for damages was based on the
tortuous acts of respondents.28 In its Motion to Dismiss, CCC cites Section 5 of Rule 2 and Section 6 of Rule 3 of the Rules of Civil
Procedure, which we quote:
"Section 5. Joinder of causes of action. - A party may in one pleading assert, in the alternative or otherwise, as many causes of
action as he may have against an opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties; x x x"
Section 6. Permissive joinder of parties. - All persons in whom or against whom any right to relief in respect to or arising out of
the same transaction or series of transactions is alleged to exist whether jointly, severally, or in the alternative, may, except as
otherwise provided in these Rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or
fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may
be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in
which he may have no interest."
The foregoing procedural rules are founded on practicality and convenience. They are meant to discourage duplicity and
multiplicity of suits. This objective is negated by insisting - - as the court a quo has done - - that the compulsory counterclaim for
damages be dismissed, only to have it possibly re-filed in a separate proceeding. More important, as we have stated earlier,
Respondents Lim and Mariano are real parties in interest to the compulsory counterclaim; it is imperative that they be joined
therein. Section 7 of Rule 3 provides:
"Compulsory joinder of indispensable parties. - Parties in interest without whom no final determination can be had of an action
shall be joined either as plaintiffs or defendants."
Moreover, in joining Lim and Mariano in the compulsory counterclaim, petitioners are being consistent with the solidary nature
of the liability alleged therein.
Second Issue:
Characterizing their counterclaim for damages against Respondents CCC, Lim and Mariano as "joint and solidary," petitioners
prayed:
"2. Ordering the plaintiff, Gregory T. Lim and Anthony A. Mariano jointly and solidarily to pay defendant actual damages in the
sum of at least P2,700,000.00;
"3. Ordering the plaintiff, Gregory T. Lim and Anthony A, Mariano jointly and solidarily to pay the defendants LPI, LCLC, COC and
Roseberg:
Obligations may be classified as either joint or solidary. "Joint" or "jointly" or "conjoint" means mancum or mancomunada or pro
rata obligation; on the other hand, "solidary obligations" may be used interchangeably with "joint and several" or "several."
Thus, petitioners' usage of the term "joint and solidary" is confusing and ambiguous.
The ambiguity in petitioners' counterclaims notwithstanding, respondents' liability, if proven, is solidary. This characterization
finds basis in Article 1207 of the Civil Code, which provides that obligations are generally considered joint, except when
otherwise expressly stated or when the law or the nature of the obligation requires solidarity. However, obligations arising from
tort are, by their nature, always solidary. We have assiduously maintained this legal principle as early as 1912 in Worcester v.
Ocampo,30 in which we held:
"x x x The difficulty in the contention of the appellants is that they fail to recognize that the basis of the present action is tort.
They fail to recognize the universal doctrine that each joint tort feasor is not only individually liable for the tort in which he
participates, but is also jointly liable with his tort feasors. x x x
"It may be stated as a general rule that joint tort feasors are all the persons who command, instigate, promote, encourage,
advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their
benefit. They are each liable as principals, to the same extent and in the same manner as if they had performed the wrongful act
themselves. x x x
"Joint tort feasors are jointly and severally liable for the tort which they commit. The persons injured may sue all of them or any
number less than all. Each is liable for the whole damages caused by all, and all together are jointly liable for the whole damage.
It is no defense for one sued alone, that the others who participated in the wrongful act are not joined with him as defendants;
nor is it any excuse for him that his participation in the tort was insignificant as compared to that of the others. x x x
"Joint tort feasors are not liable pro rata. The damages can not be apportioned among them, except among themselves. They
cannot insist upon an apportionment, for the purpose of each paying an aliquot part. They are jointly and severally liable for the
whole amount. x x x
"A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any claim which might exist against
the others. There can be but satisfaction. The release of one of the joint tort feasors by agreement generally operates to
discharge all. x x x
"Of course the court during trial may find that some of the alleged tort feasors are liable and that others are not liable. The
courts may release some for lack of evidence while condemning others of the alleged tort feasors. And this is true even though
they are charged jointly and severally."
In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or "joint and several" obligation,
the relationship between the active and the passive subjects is so close that each of them must comply with or demand the
fulfillment of the whole obligation.31 The fact that the liability sought against the CCC is for specific performance and tort, while
that sought against the individual respondents is based solely on tort does not negate the solidary nature of their liability for
tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this point:
"Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and
conditions."
The solidary character of respondents' alleged liability is precisely why credence cannot be given to petitioners' assertion.
According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on grounds that pertain solely to its
individual co-debtors.32 In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of the
obligation, from circumstances personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil Code
provides:
"A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the nature of the
obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to
the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible." (Emphasis
supplied).
The act of Respondent CCC as a solidary debtor - - that of filing a motion to dismiss the counterclaim on grounds that pertain
only to its individual co-debtors - - is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on behalf of Co-respondents
Lim and Mariano; it did not pray that the counterclaim against it be dismissed. Be that as it may, Respondent CCC cannot be
declared in default. Jurisprudence teaches that if the issues raised in the compulsory counterclaim are so intertwined with the
allegations in the complaint, such issues are deemed automatically joined.33 Counterclaims that are only for damages and
attorney's fees and that arise from the filing of the complaint shall be considered as special defenses and need not be
answered.34
CCC's Motion to Dismiss the Counterclaim on Behalf of Respondents Lim and Mariano Not Allowed
While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that pertain to individual defendants
Lim and Mariano, it cannot file the same Motion on their behalf for the simple reason that it lacks the requisite authority to do
so. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their
behalf, without being so authorized. Thus, unless expressly adopted by Lim and Mariano, the Motion to Dismiss the compulsory
counterclaim filed by Respondent CCC has no force and effect as to them.
1. The counterclaims against Respondents CCC, Gregory T. Lim and Anthony A. Mariano are compulsory.
2. The counterclaims may properly implead Respondents Gregory T. Lim and Anthony A. Mariano, even if both were not parties
in the original Complaint.
3. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include, in a Motion to Dismiss, defenses
available to their co-defendants; nevertheless, the same Motion cannot be deemed to have been filed on behalf of the said co-
defendants.
4. Summons must be served on Respondents Lim and Mariano before the trial court can obtain jurisdiction over them.
WHEREFORE, the Petition is GRANTED and the assailed Orders REVERSED. The court of origin is hereby ORDERED to take
cognizance of the counterclaims pleaded in petitioners' Answer with Compulsory Counterclaims and to cause the service of
summons on Respondents Gregory T. Lim and Anthony A. Mariano. No costs.
SO ORDERED.
Endnotes:
8 This case was deemed submitted for decision on November 13, 2003, upon receipt by this Court of Petitioners' Memorandum
signed by Atty. Norma Margarita B. Patacsil of the Sycip Salazar Hernandez & Gatmaitan Law Firm. Respondent CCC's
Memorandum, signed by Attys. Rodolf C. Britanico and Melanie T. Chua of the Pangilinan Britanico Sarmiento & Franco Law
Offices, was received by the Court on October 10, 2003.
9 Rollo, p. 383.
16 Answer and Counterclaim ad Cautelam, pp. 7-9; rollo, (Annex-L) pp. 190-192.
19 Metals Engineering Resources v. Court of Appeals, 203 SCRA 273, October 28, 1991.
20 Sapugay v. CA, supra on pp. 469-470, per Regalado, J. Section 14, Rule 6 is now Section 12, Rule 6 under the 1997 Rules of
Civil Procedure.
"Real party-in-interest. A real party in interest is the party who stands to be benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted
or defended in the name of the real party in interest."
Section 7 of Rule 3 of the 1997 Rules of Civil Procedure:
"Compulsory Joinder of indispensable parties. Parties in interest without whom no final determination can be had of an action
shall be joined either as plaintiffs or defendants."
30 22 Phil. 42, February 27, 1912, per Johnson, J. The pronouncement in Worcester was later reiterated in Perfecto v. Contreras,
28 Phil. 538, December 2, 1914; Versoza and Ruiz, Remetria y Cia v. Lim, 45 Phil. 416, November 15, 1923.
31 Paras, Civil Code of the Phil.ippines, Annotated, Vol. IV, 10th ed., pp. 215-216 (citing 8 Manresa 194), 216. See Article 1207 of
the Civil Code, which defines solidary obligations as follows:
"The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each
one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the
prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity."
32 The grounds raised by Respondent CCC in its Motion to Dismiss the counterclaim solely pertain to Lim and Mariano:
a) Lim and Mariano were not parties to the original Complaint and cannot therefore be impleaded in the counterclaim.
b) Lim and Mariano were mere officials of CCC; their assailed acts, done by virtue of a Board Resolution, were corporate acts for
which they cannot be made personally liable. (Motion to Dismiss dated December 29, 2001; rollo, pp. 220-225.
THIRD DIVISION
DECISION
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 of the Decision2 dated May 19, 2010 of the Court of Appeals (CA) in CA-
G.R. CV. No. 66274 modifying the Decision3 dated July 30, 1999 of the Regional Trial Court (RTC) of San Fernando City,
Pampanga, Branch 45 for Sum of Money in Civil Case No. 11708.
Factual Antecedents
On February 19, 1990, the spouses Danilo and Magdalena Manalastas (spouses Manalastas) executed a Real Estate Mortgage
(REM)4 in favor of respondent China Banking Corporation (Chinabank) over two real estate properties covered by Transfer
Certificate of Title Nos. 173532-R and 173533-R, Registry of Deeds of Pampanga, to secure a loan from Chinabank of
₱700,000.00 intended as working capital in their rice milling business. During the next few years, they executed several
amendments to the mortgage contract progressively increasing their credit line secured by the aforesaid mortgage. Thus, from
₱700,000.00 in 1990, their loan limit was increased to ₱1,140,000.00 on October 31, 1990, then to ₱1,300,000.00 on March 4,
1991, and then to2,450,000.00 on March 23, 1994.5 The spouses Manalastas executed several promissory notes (PNs) in favor
of Chinabank. In two of the PNs, petitioners Estanislao and Africa Sinamban (spouses Sinamban) signed as co-makers.
On November 18, 1998, Chinabank filed a Complaint6 for sum of money, docketed as Civil Case No. 11708, against the spouses
Manalastas and the spouses Sinamban (collectively called the defendants) before the RTC. The complaint alleged that they
reneged on their loan obligations under the PNs which the spouses Manalastas executed in favor of Chinabank on different
dates, namely:
1. PN No. OACL 634-95, dated April 24, 1995, for a loan principal of ₱1,800,000.00, with interest at 23% per annum; the spouses
Manalastas signed alone as makers.7
2. PN No. OACL 636-95, dated May 23, 1995, for a loan principal of 325,000.00, with interest at 21% per annum; the spouses
Sinamban signed as solidary co-makers;8
3. PN No. CLF 5-93, dated February 26, 1991, for a loan principal of ₱1,300,000.00, with interest at 22.5% per annum; only
Estanislao Sinamban signed as solidary co-maker.9
All of the three promissory notes carried an acceleration clause stating that if the borrowers failed to pay any stipulated interest,
installment or loan amortization as they accrued, the notes shall, at the option of Chinabank and without need of notice,
immediately become due and demandable. A penalty clause also provides that an additional amount shall be paid equivalent to
1/10 of 1% per day of the total amount due from date of default until fully paid, and the further sum of 10% of the total amount
due, inclusive of interests, charges and penalties, as and for attorney’s fees and costs.10
In Chinabank’s Statement of Account11 dated May 18, 1998, reproduced below, the outstanding balances of the three loans are
broken down, as follows:
(a) PN No. OACL 636-95 has an outstanding principal of ₱325,000.00, cumulative interest of ₱184,679.00, and cumulative
penalties of ₱258,050.00, or a total amount due of ₱767,729.00; (b) PN No. OACL 634-95 has an outstanding principal of
₱1,800,000.00, cumulative interest of ₱1,035,787.50, and cumulative penalties of 1,429,200.00, or a total amount due of
4,264,987.50; and
(c) PN No. CLF 5-93 has an outstanding principal of ₱148,255.08, cumulative interest of ₱64,461.84, and cumulative penalties of
₱156,541.58, or a total amount due of ₱369,258.50. Note that from the original amount of ₱1,300,000.00, the loan principal had
been reduced to only ₱148,255.08 as of May 18, 1998.12
PN NUMBER
----------------------- PRINCIPAL
----------------------- INTEREST
----------------------- 36%
PENALTY FEE
----------------------- TOTAL
-----------------------
OACL 636-95 325,000.00 184,679.00 258,050.00 767,729.00
OACL 634-95 1,800,000.00 1,035,787.50 1,429,200.00 4,264,987.50
CLF 005-93 148,255.08
----------------------- 64,461.84
----------------------- 156,541.58
----------------------- 369,258.50
-----------------------
TOTAL P2,273,255.08 1,284,928.34 1,843,791.58 5,401,975.00
TOTAL AMOUNT DUE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -5,401,975.00
PLUS 10% ATTORNEY’S FEE - - - - - - - - - - - - - - - - - - - - - - - - - - 540,197.50
-----------------------
5,942,172.50
ADD: OTHER EXPENSES
INSURANCE PREMIUM 22,618.37
POSTING OF NOTICE OF SALE 700.00
PUBLICATION FEE17,500.00
REGISTRATION OF CERTIFICATE OF SALE (MISC.) 1,000.00
REGISTRATION OF CERTIFICATE OF SALE (REGISTER OF DEEDS)
The spouses Sinamban, in their Answer17 dated February 26, 1999, averred that they do not recall having executed PN No. OACL
636-95 for ₱325,000.00 on May 23, 1995, or PN No. CLF 5-93 for ₱1,300,000.00 on February 26, 1991, and had no participation
in the execution of PN No. OACL 634-95 for ₱1,800,000.00 on April 24, 1995. They however admitted that they signed some PN
forms as co-makers upon the request of the spouses Manalastas who are their relatives; although they insisted that they derived
no money or other benefits from the loans. They denied knowing about the mortgage security provided by the spouses
Manalastas, or that the latter defaulted on their loans. They also refused to acknowledge the loan deficiency of ₱1,758,427.87
on the PNs, insisting that the mortgage collateral was worth more than ₱10,000,000.00, enough to answer for all the loans,
interests and penalties. They also claimed that they were not notified of the auction sale, and denied that they knew about the
Certificate of Sale18 and the Statement of Account dated May 18, 1998, and insisted that Chinabank manipulated the
foreclosure sale to exclude them therefrom. By way of counterclaim, the Spouses Sinamban prayed for damages and attorney’s
fees of 25%, plus litigation expenses and costs of suit.
The spouses Manalastas were declared in default in the RTC Order19 dated April 6, 1999, and Chinabank was allowed to present
evidence ex parte as against them, but at the pre-trial conference held on July 5, 1999, the spouses Sinamban and their counsel
also did not appear;20 hence, in the Order21 dated July 5, 1999, the RTC allowed Chinabank to present evidence ex parte
against the defendants before the Branch Clerk of Court. During the testimony of Rosario D. Yabut, Branch Manager of
Chinabank-San Fernando Branch, all the foregoing facts were adduced and confirmed, particularly the identity of the pertinent
loan documents and the signatures of the defendants. On July 21, 1999, the court admitted the exhibits of Chinabank and
declared the case submitted for decision.22
On July 30, 1999, the RTC rendered its Decision23 with the following dispositive portion: WHEREFORE, premises considered,
judgment is hereby rendered in favor of plaintiff China Banking Corporation and against defendant Sps. Danilo and Magdalena
Manalastas and defendant Sps. Estanislao and Africa Sinamban to jointly and severally pay [Chinabank] the amount of
₱1,758,427.87, representing the deficiency between the acquisition cost of the foreclosed real estate properties and the
outstanding obligation of defendants at the time of the foreclosure sale; interest at the legal rate of 12% per annum from and
after May 18, 1998; attorney’s fees equivalent to 10% of the aforesaid deficiency amount and the litigation and costs of suit.
SO ORDERED.24
On Motion for Reconsideration25 of the spouses Sinamban dated August 27, 1999, to which Chinabank filed an Opposition26
dated September 14, 1999, the RTC in its Order27 dated October 22, 1999 set aside the Decision dated July 30, 1999 with
respect to the spouses Sinamban, in this wise:
As it is undisputed that Exhibit "B" (Promissory Note dated April 24, 1995 in the amount of ₱1,800,000.00), was not signed by
the Spouses Sinamban it would not be equitable that the said defendants be made solidarily liable for the payment of the said
note as co-makers of their co-defendants Spouses Manalastas who are the one[s] principally liable thereto. Prescinding from this
premise, the movant spouses could only be held liable for the two (2) promissory notes they have signed, Promissory Notes
dated May 23, 1995 in the amount of ₱325,000.00 and February 26, 1991 in the amount of ₱1,300,000.00, Exhibits "A" and "C",
respectively. As the total amount of the said notes is only ₱1,625,000.00, so even if we would add the interests due thereon,
there is no way that the said outstanding loan exceed[s] the acquisition cost of the foreclosed real estate properties subject
hereof in the amount of ₱4,600,000.00.It would appear then that the Spouses Sinamban could not be held liable for the
deficiency in the amount of ₱1,758,427.87 which should justly be borne alone by the defendant Spouses Manalastas. Guided by
law and equity on the matter, the court will not hesitate to amend a portion of its assailed decision to serve the interest of
justice.
WHEREFORE, premises considered, the decision dated July 30, 1999 is hereby Reconsidered and Set Aside with respect to the
Spouses Estanislao and Africa Sinamban hereby Relieving them from any liability arising from the said Decision which is affirmed
in toto with respect to Spouses Manalastas.
The RTC ruled that the proceeds of the auction were sufficient to answer for the two PNs co-signed by the spouses Sinamban,
including interest and penalties thereon, and therefore the spouses Manalastas should solely assume the deficiency of
₱1,758,427.87. Chinabank moved for reconsideration on November 11, 1999,29 to which the spouses Sinamban filed their
comment/opposition on November 23, 1999.30
On December 8, 1999, the RTC set aside its Order dated October 22, 1999 and reinstated its Decision dated July 30, 1999, with
modification, as follows:31
WHEREFORE, premises considered, the instant Motion for Reconsideration of plaintiff is Granted.
Accordingly, the dispositive portion of the Decision dated July 30, 1999 is hereby Modified to read as follows:
WHEREFORE, premises considered, judgment [is] hereby rendered in favor of plaintiff China Banking Corporation and against the
defendant Sps. Danilo and Magdalena Manalastas and defendant Sps. Estanislao and Africa Sinamban, ordering them to pay as
follows:
1. For defendant Sps. Danilo and Magdalena Manalastas, the amount of ₱1,758,427.87, the deficiency between the acquisition
cost of the foreclosed real properties and their outstanding obligation;
2. For defendant Sps. Sinamban a percentage of ₱1,758,427.87, jointly and severally with the defendant Sps. [Manalastas] only
on two (2) promissory notes;
SO ORDERED.32
This time the RTC held that the spouses Sinamban must, solidarily with the spouses Manalastas, proportionately answer for the
loan deficiency pertaining to the two PNs they co-signed, since the mortgage security provided by the spouses Manalastas
secured all three PNs and thus also benefited them as co-makers. But since they did not co-sign PN No. OACL 634-95, the
deficiency judgment pertaining thereto will be the sole liability of the spouses Manalastas.
Ruling of the CA
From the Order dated December 8, 1999 of the RTC, the spouses Sinamban appealed to the CA on January 4, 2000, docketed as
CA-G.R. CV. No. 66274, interposing the following errors of the RTC, viz:
THE LOWER COURT ERRED WHENIT HELD DEFENDANTSAPPELLANTS SPS. SINAMBAN LIABLE TO PAY A PERCENTAGE OF
₱1,758,427.87, JOINTLY AND SEVERALLY WITH THE DEFENDANTS SPS. MANALASTAS ON THE TWO PROMISSORY NOTES
(EXHIBITS ‘C’ AND ‘A’).
II
THE LOWER COURT ERRED WHEN IT RECONSIDERED AND SET ASIDE ITS PREVIOUS ORDER DATED 22 OCTOBER 1999 RELIEVING
DEFENDANTS-APPELLANTS SPS. SINAMBAN FROM ANY LIABILITY ARISING FROM THE DECISION DATED 30 JULY 1999.
III
THE LOWER COURT ERRED WHEN IT RENDERED THE VAGUE ORDER OF 8 DECEMBER 1999 (ANNEX ‘B’ HEREOF).33
On May 19, 2010, the CA rendered judgment denying the appeal, the fallo of which reads: WHEREFORE, considering the
foregoing disquisition, the appeal is DENIED. The Decision dated 30 July 1999 and the Order dated 08 December 1999 of the
Regional Trial Court of San Fernando, Pampanga, Branch 45 in Civil Case No. 11708are hereby AFFIRMED with MODIFICATION in
that:
1. Sps. Danilo and Magdalena Manalastas are solidarily liable for the deficiency amount of Php507,741.62 (inclusive of 10%
attorney’s fees) on Promissory Note No. OACL 634-95 dated 24 April 1995;
2. Sps. Estanislao and Africa Sinamban are solidarily liable with Sps. Danilo and Magdalena Manalastas for the amount of
Php844,501.90 (inclusive of 10% attorney’s fees) on Promissory Note No. OACL00636-95 dated 23 May 1995;
3. Estanislao Sinamban and Sps. Danilo and Magdalena Manalastas are solidarily liable for the amount of Php406,184.35
(inclusive of 10% attorney’s fees) on Promissory Note No. CLF 5-93 dated 26 February 1991; and
4. The foregoing amounts shall bear interest at the rate of 12% per annum from 18 November 1998 until fully paid.
In this petition for review, the spouses Sinamban seek to be completely relieved of any liability on the PNs, solidary or otherwise,
by interposing the following issues:
5.1 Whether or not the Honorable Court of Appeals erred in not considering that the Sps. Sinamban’s obligations under PN#
OACL 636-95 dated May 23, 1995 in the principal sum of Php325,000.00 and PN# CLF 5-93 dated February 26, 1991 in the
principal sum of Php1,300,000.00 are more onerous and burdensome on their part as mere sureties (co-makers) of their co-
defendants-spouses Danilo and Magdalena Manalastas’ (hereinafter referred to as the "Sps. Manalastas") obligations over the
same, compared to the Sps. Manalastas’ sole obligation under PN# OACL 634-95 dated 24 April 1995 in the principal amount of
Php1,800,000.00, such that the proceeds of the auction sale of the properties securing all the three (3) promissory notes should
first be applied to satisfy the promissory notes signed by the Sps. Sinamban; and
5.2 Whether or not the Honorable Court of Appeals erred in not considering the facts indubitably showing that it is the Sps.
Sinamban, as the debtors, and not the respondent bank, who are given the choice under Article 1252 of the Civil Code to have
the proceeds of the auction sale applied as payments to their obligations under PN# OACL 636-95 dated 23 May 1995 and PN#
CLF 5-93 dated 26 February 1991.35
"A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the
conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a
legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith. If he reneges on
his promise without cause, he forfeits the sympathy and assistance of this Court and deserves instead its sharp repudiation."36
Employing words of common commercial usage and well-accepted legal significance, the three subject PNs uniformly describe
the solidary nature and extent of the obligation assumed by each of the defendants in Civil Case No. 11708, to wit:
"FOR VALUE RECEIVED, I/We jointly and severally promise to pay to the CHINA BANKING CORPORATION or its order the sum of
PESOS x x x[.]"37 (Emphasis ours)
According to Article 2047 of the Civil Code,38 if a person binds himself solidarily with the principal debtor, the provisions of
Articles 1207 to 1222 of the Civil Code (Section 4, Chapter 3,Title I, Book IV) on joint and solidary obligations shall be observed.
Thus, where there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, Article
1207 provides that among them, "[t]here is a solidary liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity." It is settled that when the obligor or obligors undertake to be "jointly and
severally" liable, it means that the obligation is solidary.39 In this case, the spouses Sinamban expressly bound themselves to be
jointly and severally, or solidarily, liable with the principal makers of the PNs, the spouses Manalastas.
Moreover, as the CA pointed out, in Paragraph 5 of the PNs, the borrowers and their co-makers expressly authorized Chinabank,
as follows:
[T]o apply to the payment of this note and/or any other particular obligation or obligations of all or any one of us to the CHINA
BANKING CORPORATION as the said Corporation may select, irrespective of the dates of maturity, whether or not said
obligations are then due, any or all moneys, securities and things of value which are now or which may hereafter be in its hands
on deposit or otherwise to the credit of, or belonging to, all or any one of us, and the CHINA BANKING CORPORATION is hereby
authorized to sell at public or private sale such securities or things of value for the purpose of applying their proceeds to such
payments.40
The PNs were executed to acknowledge each loan obtained from the credit line extended by Chinabank, which the principal
makers and true beneficiaries, the spouses Manalastas, secured with a REM they executed over their properties. As the RTC
noted in its Order dated December 8, 1999, "the real estate mortgage was constituted to secure all the three (3) promissory
notes," concluding that "[j]ust as the liability of the [spouses] Sinamban was lessened by the foreclosure proceedings, so must
they also share in the deficiency judgment, in proportion to the PNs they co-signed with the [spouses] Manalastas, but notthe
entire deficiency judgment of ₱1,758,427.87."41
Significantly, in modifying the RTC’s second amended decision, which provides for the pro rata distribution of the loan deficiency
of ₱1,758,427.87, the CA first applied the entire net proceeds of the auction sale of ₱4,183,744.63 (after auction expenses of
₱416,255.37), to PN No. OACL 634-95, which on May 18, 1998 had an outstanding balance of ₱4,264,987.50, inclusive of interest
and penalties, plus 10% attorney’s fees, or a total of ₱4,691,486.25. Thus, ₱4,691,486.25 less ₱4,183,744.63 leaves a deficiency
on PN No. OACL 634-95 of ₱507,741.62, which is due solely from the spouses Manalastas.
As for PN No. OACL 636-95, the CA ordered the spouses Sinamban to pay, solidarily with the spouses Manalastas, the entire
amount due thereon, ₱844,501.90, consisting of the loan principal of ₱767,729.00 plus accrued interest, penalties and 10%
attorney’s fees; concerning PN No. CLF 5-93, the CA ordered the spouses Sinamban to pay, solidarily with the spouses
Manalastas, the amount of ₱406,184.35, consisting of the balance of the loan principal of ₱369,258.50 plus accrued interest,
penalties and 10% attorney’s fees. The CA further ordered the payment of 12% interest per annum from November 18, 1998,
the date of judicial demand, until fully paid, on the above deficiencies.
Article 1216 of the Civil Code provides that "[t]he creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected." Article 125242 of the Civil Code does not apply, as
urged by the petitioners, because in the said article the situation contemplated is that of a debtor with several debts due,
whereas the reverse is true, with each solidary debt imputable to several debtors.
While the CA correctly noted that the choice is given to the solidary creditor to determine against whom he wishes to enforce
payment, the CA stated that Chinabank, in the exercise of the aforesaid option, chose to apply the net proceeds of the
extrajudicial foreclosure sale first to the PN solely signed by spouses Manalastas.43 Thus, the net proceeds were applied first to
PN No. OACL 634-95 in the principal amount of ₱1,800,000.00, instead of pro rata to all three PNs due.
The Court finds this factual conclusion of the CA not supported by any evidence or any previous arrangement.1âwphi1 To the
contrary, as clearly shown in its Statement of Account dated May 18, 1998, Chinabank opted to apply the entire auction
proceeds to the aggregate amount of the three PNs due, ₱5,401,975.00 (before attorney’s fees and auction expenses). Had it
chosen to enforce the debts as ruled by the CA, the Statement of Account would have shown that the loan due on PN No. OACL
634-95 which is ₱4,691,486.25, should have been deducted first from the net auction proceeds of ₱4,183,744.63, arriving at a
deficiency of ₱507,741.62on PN No. OACL 634-95 alone; thereby, leaving no remainder of the proceeds available to partially
settle the other two PNs. As it appears, the auction proceeds are not even sufficient to cover just PN No. OACL 634-95 alone.
But as the Court has noted, by deducting the auction proceeds from the aggregate amount of the three loans due, Chinabank in
effect opted to apply the entire proceeds of the auction simultaneously to all the three loans. This implies that each PN will
assume a pro rata portion of the resulting deficiency on the total indebtedness as bears upon each PN’s outstanding balance.
Contrary to the spouses Sinamban’s insistence, none of the three PNs is more onerous than the others to justify applying the
proceeds according to Article 1254 of the Civil Code, in relation to Articles 1252 and 1253.44 Since each loan, represented by
each PN, was obtained under a single credit line extended by Chinabank for the working capital requirements of the spouses
Manalastas’ rice milling business, which credit line was secured also by a single REM over their properties, then each PN is
simultaneously covered by the same mortgage security, the foreclosure of which will also benefit them proportionately. No PN
enjoys any priority or preference in payment over the others, with the only difference being that the spouses Sinamban are
solidarily liable for the deficiency on two of them.
Pursuant, then, to the order or manner of application of the auction proceeds chosen by Chinabank, the solidary liability of the
defendants pertaining to each PN shall be as follows:
a) PN No. OACL 634-95, with a balance as of May 18, 1998 of ₱4,264,987.50: its share in the total deficiency is computed as the
ratio of ₱4,264,987.50 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or ₱1,388,320.55, (not ₱507,741.62 as found by the CA);
b) PN No. OACL 636-95, with a balance of ₱767,729.00 as of May 18, 1998: its share in the deficiency is computed as the ratio of
₱767,729.00 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or ₱249,907.87, (not ₱844,501.90 as computed by the CA);
c) PN No. CLF 5-93, with an outstanding balance of ₱369,258.50 as of May 18, 1998: its share in the deficiency is computed as
the ratio of ₱369,258.50 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or ₱120,199.45, (not ₱406,184.35 as found by the CA).
In short, in the CA decision, the spouses Manalastas would be solely liable on PN No. OACL 634-95 for only ₱507,741.62(instead
of the much bigger amount of ₱1,388,320.55which this Court found), whereas the spouses Sinamban would be solidarily liable
with the spouses Manalastas for a total deficiency of ₱1,250,686.25 on PN No. OACL 636-95 and PN No. CLF 5-93. But under the
Court’s interpretation, the spouses Sinamban are solidarily liable with the spouses Manalastas for only ₱370,107.32on the said
two PNs, for a significant difference of ₱880,578.93.
The subject three PNs bear interests ranging from 21% to 23% per annum, exclusive of penalty of 1% on the overdue amount
per month of delay, whereas in its complaint, Chinabank prayed to recover only the legal rate of 12% on whatever judgment it
could obtain. Meanwhile, the Monetary Board of the Bangko Sentral ng Pilipinas in its Resolution No. 796 dated May 16, 2013,
and now embodied in Monetary Board Circular No. 799, has effective July 1, 2013 reduced to 6%, from 12%, the legal rate of
interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of
stipulation.45 Since Chinabank demanded only the legal, not the stipulated, interest rate on the deficiency and attorney’s fees
due, the defendants will solidarily pay interest on their shares in the deficiency at the rate of 12% from November 18, 1998 to
June 30, 2013, and 6% from July 1, 2013 until fully paid. WHEREFORE, the Decision of the Court of Appeals dated May 19, 2010
in CA-G.R. CV No. 66274 is MODIFIED. The Decision dated July 30, 1999 and the Order dated December 8, 1999 of the Regional
Trial Court of San Fernando City, Pampanga, Branch 45 in Civil Case No. 11708 are hereby AFFIRMED with MODIFICATIONS as
follows:
1. Spouses Danilo and Magdalena Manalastas are solidarily liable for the deficiency amount of 1,388,320.55 (inclusive of 10%
attorney’s fees) on Promissory Note No. OACL 634-95 dated April 24, 1995;
2. Spouses Estanislao and Africa Sinamban are solidarily liable with spouses Danilo and Magdalena Manalastas for the deficiency
amount of ₱249,907.87(inclusive of 10% attorney’s fees) on Promissory Note No. OACL 636-95 dated May 23, 1995;
3. Estanislao Sinamban and spouses Danilo and Magdalena Manalastas are solidarily liable for the deficiency amount of
₱120,199.45 (inclusive of 10% attorney’s fees) on Promissory Note No. CLF 5-93 dated February 26, 1991; and
4. The foregoing amounts shall bear interest at the rate of twelve percent (12%) per annum from November 18, 1998 to June 30,
2013, and six percent (6%) per annum from July 1, 2013 until fully paid.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
DIOSDADO M. PERALTA
Associate Justice MARTIN S. VILLARAMA, JR.
Associate Justice
FRANCIS H. JARDELEZA
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer
of the opinion of the Court's Division.
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in
the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's
Division.
MARIA LOURDES P.A. SERENO
Chief Justice
Footnotes
2 Penned by Associate Justice Celia C. Librea-Leagogo, with Associate Justices Remedios A. Salazar-Fernando and Michael P.
Elbinias, concurring; id. at 28-53.
4 Id. at 64-66.
5 Id. at 67-72.
6 Id. at 56-60.
7 Id. at 61.
8 Id. at 62.
9 Id. at 63.
10 Id. at 57.
11 Id. at 75.
12 Id.
13 Id.
14 Id. at 58-59.
15 But note that the PNs stipulated interest rates from 21% to 23% per annum, plus a penalty of 1% per month of delay.
16 Rollo, p. 59.
17 Id. at 79-82.
18 Id. at 73-74.
19 Id. at 89.
20 Id. at 97.
21 Id.
22 Id. at 98.
23 Id. at 101-104.
24 Id. at 104.
25 Id. at 105-110.
26 Id. at 115-119.
27 Id. at 120-122.
28 Id. at 121-122.
29 Id. at 123-126.
30 Id. at 127-128.
31 Id. at 131-133.
32 Id. at 132-133.
33 Id. at 39-40.
34 Id. at 49-50.
35 Id. at 18-19.
36 Sierra v. Court of Appeals, G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795.
38 Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal 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.
39 Crystal v. Bank of the Philippine Islands, G.R. No. 172428, November 28, 2008, 572 SCRA 697, 703. See also Escaño v. Ortigas,
Jr., 553 Phil. 24, 39 (2007).
41 Id. at 132.
42 ART. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of
making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of
payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of
the same, unless there is a cause for invalidating the contract.
43 Rollo, p. 47.
44 Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of
making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of
payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of
the same, unless there is a cause for invalidating the contract.
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests
have been covered.
Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall
be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.
45 S.C. Megaworld Construction and Development Corporation v. Parada, G.R. No. 183804, September 11, 2013, 705 SCRA 584,
608; Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 455-456.
THIRD DIVISION
DECISION
PERALTA, J.:
This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure (Rules) seeks to reverse the November
23, 2011 Decision1 and January 17, 2013 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 84075, which annulled and
set aside the April 12, 2004 Decision3 of the Regional Trial Court (RTC), Branch 18, Tagaytay City, Cavite, in Civil Case No. TG-
1672.
Respondent Belle Corporation (respondent) is a publicly-listed company primarily engaged in the development and operation of
several leisure and recreational projects in Tagaytay City, Cavite, such as the Tagaytay Highlands. On November 20, 1996, it filed
a Complaint, docketed as Civil Case No. TG-1672, for quieting of title and damages with prayer for temporary restraining order
and/or preliminary mandatory injunction against Florosa A. Bautista (Bautista) and the Register of Deeds of Tagaytay City.4
Allegedly, respondent is the registered owner in possession of four (4) parcels of land known as Lots 1 to 4 of the consolidation
and subdivision plan Pcs-04-010666 containing an aggregate area of 317,918 square meters, located at Barangay Sungay,
Tagaytay City, under Transfer Certificate of Title(TCT) Nos. P-1863 to P-1866. On October 31, 1996, it received a demand letter5
from Bautista's counsel which ordered the immediate stoppage of its occupation and use of a substantial portion of the land
that she purportedly owns. She claimed that respondent had illegally constructed a road on said property without her prior
notice or permission. Before a response could be sent, Bautista caused the posting of a signboard on the entrance access road to
Tagaytay Highlands International Golf Club and the Country Club of Tagaytay Highlands, notifying the public as
follows:ChanRoblesvirtualLawlibrary
Please be informed that based on a geodetic re-survey a substantial portion of this entrance road leading to Tagaytay Highlands
was found to be inside the perimeter of a private property covered by TCT No. P-671.
Effective November 1, 1996, the registered owner of TCT No. P-671 will enforce her rights and entry and/or exit to her property
without her prior consent and approval will be strictly prohibited.6
A copy of TCT No. P-671 showed that it emanated from Original Certificate of Title (OCT) No. OP-283 which, in tum, appears to
have been issued pursuant to Free Patent No. (IV-4) 12573 on January 20, 1977 and registered on February 4, 1977.7
Respondent thus sought to cancel the free patent for being null and void, constituting a cloud on its own title.
To support its cause, respondent averred that its title over a portion of the subject lot was originally registered as early as March
30, 1959 in the name of Tagaytay Development Company and Patricia S. Montemayor under OCT No. 0-216, pursuant to Decree
No. N-70245 issued on November 12, 1958 in Land Registration Case No. 426 (LRC Record No. 52607).8 By reason of
Montemayor's death, OCT No. 0-216 was cancelled by TCT No. T-2770, which was registered on September 21, 1960 in favor of
Tagaytay Development Company and the heirs of Montemayor.9 The land covered by TCT No. T-2770 was thereafter partitioned
and subdivided into five lots, two of which, Lot Nos. 1-C and 2-B of the subdivision plan (LRC) Psd-9174, were assigned to
Tagaytay Development Company in whose name TCT T-2773 was registered on September 27, 1960.10 Then, on July 12, 1991,
TCT No. T-24616 cancelled and replaced TCT T-2773 in the name of Tagaytay Highlands Corporation.11 From 1989 to 1991,
respondent began purchasing lands adjoining the property for its various development projects in the area. To gain access to
these properties, it constructed an eight-meter wide road, the entrance to which passes through a portion of the property. On
November 29, 1993, Tagaytay Highlands Corporation and respondent merged, with the latter as the surviving corporation.12 In
July 1995, Lot Nos. 1-C and 2-B covered by TCT No. T-24616 were consolidated with Lots 1 and 2 (Psu- 109694) covered by TCT
No. P-578.13 After, the consolidated parcels of land were subdivided into five lots under consolidation and subdivision plan Pcs-
04-010666. In view of this, TCT Nos. T-24616 and P-578 were cancelled and replaced by TCT Nos. P-1863 to P-1867, which were
registered on December 12, 1995.14cralawrednad
On May 5, 1997, Bautista filed an Answer with Compulsory Counterclaims and Opposition to the Prayer for Issuance of
Preliminary Mandatory Injunction.15 She countered that respondent should be bound and strictly comply with the verification
survey of the Department of Environment and Natural Resources (DENR) Regional Office No. IV, which was conducted pursuant
to the parties' Joint Request for Verification Survey dated January 20, 1997.16 The survey concluded that, if the dates of original
registration are to be considered as frame of reference, it is respondent's title which actually overlapped with Bautista's
property.17 Specifically, Lot 1 of Pcs-04-010666 under TCT No. P-1863 extended beyond Lot 4123-B of Psd-04-051856 under TCT
No. P-671. Likewise, Bautista claimed that as shown on the face of TCT No. P-1863 said title originated not from OCT No. 0-216
but from OCT No. OP-287 pursuant to a Free Patent issued in the name of Paz M. Del Rosario, which was granted by the
President of the Philippines on January 27, 1977 and registered on February 14, 1977.
Trial on the merits ensued. During the presentation of evidence by the defense, respondent was informed that Bautista is no
longer the owner of the property covered by TCT No. P-671 as it was already foreclosed by petitioner Land Bank of the
Philippines; that TCT No. P-3663 was issued in the bank's name; and, that the notice of lis pendens annotated in TCT No. P-671
was not carried over to the new title.
On June 21, 2001, respondent filed a Motion for Leave to File Amended Petition18 impleading petitioner as indispensable party.
Allegedly, on August 19, 1994, Bautista mortgaged to petitioner the land covered by TCT No. P-671 in order to secure a loan
amounting to 10,000,000.00. Bautista defaulted in her obligation resulting in the foreclosure of the property on October. 15,
1997, with respect to which respondent was not aware or notified. Upon Bautista's failure to redeem the property and
petitioner's consolidation of ownership, TCT No. P-671 was cancelled and TCT No. P-3663 was registered on June 9, 1999.
The trial court granted respondent's motion.19 Upon receiving the summons, petitioner filed an Answer (With Special and
Affirmative Defenses, Compulsory Counterclaim, Cross Claim and Opposition to Injunction).20 Later, an Amended Answer was
filed to include a Third Party Complaint against Liezel's Garments, Inc., represented by its President and General Manager
Dolores Bautista.21cralawrednad
Claiming that it is an innocent mortgagee for value, petitioner asserted that it observed due diligence and prudence expected of
it as a banking institution. It pointed out that prior to the approval of the loan application, its representative verified the status
of the collateral covered by TCT No. P-671, which revealed t at the subject property was registered in the name of Bautista and
that the same is free and clear of any lien or encumbrance. Also, upon ocular inspection, no adverse ownership or interest was
found. Therefore, in the absence of anything to excite or arouse suspicion, petitioner is legally justified to rely on the mortgagor
and what appears on the face of her certificate of title.
By way of Crossclaim, petitioner alleged that when Bautista sought to mortgage the subject property, its representatives were
made to believe that no other person/s has/have an interest thereon and that she has a clean and valid title thereto; and that
without such representation, petitioner would not have allowed or consented to the mortgage. Thus, in the event that the trial
court holds that respondent has a sufficient cause of action, Bautista should be directed to pay the sum of P16,327,991.40
representing unpaid principal, interests, penalties, other charges, and any and all damages which may be suffered as a
consequence.
Lastly, to support its Third Party Complaint, petitioner contended that Liezel 's Garments, Inc. should be made to pay its
outstanding obligation of 16,327,991.40, pursuant to the Omnibus Credit Line Agreement dated August 16, 1994 and August 30,
1995,22 both of which were secured by a real estate mortgage23 involving the disputed property. As evidence of the
availments/releases made, it allegedly executed in favor of petitioner promissory notes amounting to P7,672.091.11 and
P3,000,000.00 on June 30, 1995 and September 30, 1995, respectively.24cralawrednad
In response, Liezel 's Garments, Inc. filed an Answer (To the Third Party Complaint)25cralawred It stressed that the subject
property is free from all forms of liens and encumbrances when the mortgage contract was executed with petitioner, since
Bautista was then its absolute and lawful owner with a clean and valid title. It reiterated petitioner's position that there is
nothing from Bautista's title which could arouse suspicion and, by reason thereof, the bank has no obligation to look beyond
what appears on the face of the certificate of title.
After trial, the RTC ruled against respondent. The dispositive portion of the April 12, 2004 Decision ordered:cralawlawlibrary
WHEREFORE, premises considered[,] the TCT No. P-1863 issued to petitioner Belle Corporation is hereby declared VOID, in so far
as the 7,693 square meters that overlapped the property owned by private respondent Florosa A. Bautista, covered with TCT No.
T-671. Therefore, the Register of Deeds of Tagaytay City is ordered to CANCEL the said TCT No. P-1863 issued to Belle
Corporation and to issue another one to petitioner deleting that overlapping portions of 7,693 square meter described in the
technical descriptions submitted to that effect which is already a part and parcel of that land covered by Florosa A. Bautista
under TCT No. T-671.
No cost.
SO ORDERED.26
The trial court relied on the testimony of Engr. Robert C. Pangyarihan, who, in conducting the DENR verification survey, based
his findings on what appeared to be the dates of registration of the mother titles of the contending parties. It held that the land
belonging to respondent, which is covered by TCT No. P-1863 and originally registered on February 14, 1977, overlapped the
land belonging to Bautista, which is covered by TCT No. T-671 and originally registered on February 4, 1977. And since the title of
Bautista was issued earlier than that of respondent, the 7,693 sq. m. overlapping portion was already private property and
ceased to be part of the public domain.
Upon appeal by respondent, the RTC Decision was annulled and set aside. The fallo of the CA Decision dated November 23,2011
stated:ChanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant Appeal is GRANTED. The assailed Decision of the court a quo is hereby ANNULLED
AND SET ASIDE and a new one entered declaring
petitioner-appellant Belle Corporation as the legitimate owner of the disputed property; and
void Ab Initio Transfer Certificate of Title No. P-671 issued to respondent-appellee Bautista and the derivative Transfer
Certificate of Title No. P-3663 issued to respondent-appellee Land Bank of the Philippines.
Furthermore, this Court is ordering -
the Register of Deeds of Tagaytay City to cancel the respective Certificates of Title of respondent-appellee Florosa A. Bautista
and respondent-appellee Land Bank of the Philippines;
the Register of Deeds of Tagaytay City to correct the entries contained in the Transfer Certificate of Title No. P-1863 of
petitioner-appellant Belle Corporation pertinent to this case;
respondent-appellee Florosa A. Bautista and Third Party Defendant Liezel's Garments, Inc. to jointly pay respondent appellee
Land Bank of the Philippines the amount of Sixteen Million Three Hundred Twenty Seven Thousand Nine Hundred Ninety-One
Pesos and 40/100 (P16,327,991.40), the amount for which the disputed property was sold to respondent appellee Land Bank of
the Philippines at the public auction[;] [and)
Respondents-appellees Florosa A. Bautista and Land Bank to jointly and severally pay petitioner-appellant Belle Corporation the
amount of One Hundred Thousand Pesos (P100,000.00) by way of attorney's fees.
All other claims are denied for lack of merit.
SO ORDERED.27
Based on the testimonies of Reynaldo Dy-Reyes, who is from the Register of Deeds of Tagaytay City, and Engr. Pangyarihan, the
CA opined that respondent was able to prove by sufficient evidence that its mother title is OCT No. 0-216 and not OCT No. OP-
287, as erroneously written in TCT Nos. P-1863 to P-1867. Notably, the lot covered by OCT No. OP-287 and its derivative title,
TCT No. P-578, which is the purported immediate source of TCT No. P-1863, only contains an area of 92,539 sq. m. compared
with the 313,951 sq. m. area covered by TCT No. P-1863. It was further pointed out that, contrary to the stubborn insistence of
Bautista, there is no proof showing that respondent expressly waived its right to contest the result of the verification survey
conducted by the DENR regional office. For the appellate court, the parties only wanted to establish the fact of encroachment
when they commissioned Engr. Pangyarihan to conduct the survey, and that if they intended to be bound by his declaration,
they would have made an express agreement to that effect.
The CA did not find merit in the contention that petitioner is a mortgagee in good faith. It noted that not once did the bank claim
that it investigated the status of the subject property despite the fact that the same forms part of the ingress and egress of the
well-known Tagaytay Highlands since 1990 or several years before it accepted the property as collateral from Bautista. Since its
negligence was the primary, immediate and overriding reason, petitioner must bear the loss of the disputed property.
Nonetheless, this is without prejudice to the recovery of P16,327,991.40 from Bautista and Liezel's Garments, Inc., who both did
not refute the said amount.
Finally, while denying respondent's prayer for actual and moral damages, the CA granted its claim for attorney's fees "given that
this case has already dragged on for years and [respondent] has obviously spent a considerable amount of money to protect its
interest in this case."
On January 17, 2013, the CA resolved to deny petitioner's motion for reconsideration. For the purpose of clarity, however, it
modified the November 23, 2011 Decision to read:ChanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant Appeal is GRANTED. The assailed Decision of the court a quo is hereby ANNULLED
AND SET ASIDE and a new one entered declaring
petitioner-appellant Belle Corporation as the legitimate owner of the disputed property; and
void Ab Initio Transfer Certificate of Title No. P-671 issued to respondent-appellee Bautista and the derivative Transfer
Certificate of Title No. P-3663 issued to respondent-appellee Land Bank of the Philippines, insofar as tile seven thousand six
hundred ninety-tltree sqmtre meter (7,693 sq. m.) portion thereof which overlapped the land of petitioner-appellant Belle
Corporation.
Furthermore, this Court is ordering
the Register of Deeds of Tagaytay City to cancel the respective Certificates of Title of respondent-appellee Florosa A. Bautista
and respondent-appellee Land Bank of the Philippines and issue new ones to reflect the actual measurement of the lot
registered under Transfer Certificate of Title No. P-671 (and its derivative title, Transfer Certificate of Title No. P-3663) after
deducting the seven thousand six hundred ninety-three square meter (7,693 sq. m.) portion thereof which overlapped the land
of petitioner-appellant Belle Corporation;
the Register of Deeds of Tagaytay City to correct the entries contained in the Transfer Certificate of Title No. P-1863 of
petitioner-appellant Belle Corporation pertinent to this case;
respondent-appellee Florosa A. Bautista and Third Party Defendant Liezel's Garments, Inc. to jointly pay respondent appellee
Landbank of the Philippines the amount of Sixteen Million Three Hundred Twenty Seven Thousand Nine Hundred Ninety-One
Pesos and 40/100 (P16,327,991.40), the amount for which the disputed property was sold to respondent appellee Landbank of
the Philippines at the public auction[;] [and]
Respondents-appellees Florosa A. Bautista and Landbank to jointly and severally pay petitioner-appellant Belle Corporation the
amount of One Hundred Thousand Pesos (P100,000.00) by way of attorney's fees.
All other claims are denied for lack of merit.
SO ORDERED.28
A.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN HOLDING THAT BELLE CORPORATION IS NOT
BOUND BY THE FINDINGS AND CONCLUSIONS OF THE EXPERT WITNESS WHO WAS COMMISSIONED (BY BELLE CORI-'ORATION
AND BAUTISTA) TO CONDUCT A JOINT VERIFICATION SURVEY OF THE DISPUTED PROPERTY.
B.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED REVERSIJ3LE ERROR Wl-IEN IT FAILED TO APPLY SECTION
44, RULE 130 OF THE RULES OF COURT (ENTRIES IN OFFICIAL RECORDS) ON THE TITLE COVERING THE DISPUTED PROPERTY.
C.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN FINDING THAT LAND BANK IS NOT A MORTGAGEE
IN GOOD FAITH.
D.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS CORRECTLY APPLIED THE LAW WHEN IT AWARDED ATTORNEY'S FEES
TO THE RESPONDENT.29
We agree with respondent that the entries written in TCT No. T-1863 to T-1867 failed to accurately record the origin of said
titles. Having depended on erroneous entries stated on the face of said titles, the result of the verification survey issued by Engr.
Pangyarihan is, as a consequence, a mistake insofar as it states which between TCT No. T-1863 and TCT No. P-671 has
precedence.
During the course of the trial, the testimonies of witnesses30 and the certificates of title admitted in evidence established that
the origin of respondent's title over the parcels of land covered by TCT Nos. P-1863 to 1867 could be traced back from OCT Nos.
0-216 and 55 and not OCT No. OP-287 as petitioner repeatedly argues.
OCT No. 0-216 was registered on March 30, 1959 in the name of Tagaytay Development Company and Patricia S. Montemayor.
It covered a 473,782 sq. m. parcels of land particularly designated as Lot Nos. 1 and 2, plan Psu-103653-Amd.-2 Swo-29594, L.R.
Case No. 426, L.R.C. Record No. 52607. By reason of Montemayor's death, OCT No. 0-216 was later cancelled by TCT No. T-2770,
which was registered on September 21, 1960 in favor of Tagaytay Development Co., Santiago B. Montemayor, and Angelina M.
Samson.31 Thereafter, the land covered by TCT No. T-2770 was partitioned and subdivided into five lots in connection with the
plan (LRC) Psd-9174.32 Two lots, particularly Lot Nos. 1-C and 2-B of the subdivision plan (LRC) Psd-9174, being portions of Lot 1,
Psu-103653-Amd., Swo-29594, LRC Record No. 52607, with a total area of 231,891 sq. m. were assigned to Tagaytay
Development Company in whose name TCT T-2773 was registered on September 27, 1960.33 Cancelling TCT T-2773 was TCT No.
T-24616, which was registered on July 12, 1991 in the name ofTagaytay Highlands Corporation.34cralawrednad
On the other hand, OCT No. 55 was in the name of Hammon H. Buck, married to Mary B. Norman pursuant to Decree No.
753837 registered on July 31, 1941.35 It included, among others, Lot Nos. 1 and 2 of plan Psu-109694 which have a combined
land area of 93,268 sq. m.36 OCT No. 55 was cancelled with the registration of TCT No. RT-192 (202) on September 22, 1941 in
the name of Tagaytay Development Company.37 Later, on July 12, 1991, TCT No. RT-192 (202) was cancelled and, in lieu thereof,
TCT T-24614 was registered in favor of Tagaytay Highlands Corporation.38 The properties described in the certificate were
thereafter consolidated with the properties mentioned in TCT No. T-26415 and then subdivided into 14 lots.39 Consequently,
TCT No. TCT T-24614 was cancelled and TCT Nos. T-29566 to T-29579 were registered on September 19, 1994.40cralawrednad
Per Entry No. 60717/24616 of TCT No. T-24616,41 it was indicated that said title was cancelled by TCT Nos. T-31615 to T-31617.
This should not be so since TCT Nos. T-31615 to T-31617 pertain to Lots 4088-A to 4088-C, respectively, of the subdivision plan
Psd-04-080540, being portions of Lot 4088, Cad-355, with a total land area of 92,539 sq. m.42 What should have been recorded
instead is that TCT Nos. T-31615 to T-31617 are derived from TCT P-578, which was technically described as Lot 4088, Cad-355
covering exactly the same land area. TCT P-578 originated from OCT OP-287 pursuant to Free Patent No. 579975 issued on
January 27, 1977 in favor of Paz M. Del Rosario and registered on February 14, 1977. Likewise erroneous is the notation43 in TCT
P-578 that it was cancelled by virtue of the issuance of TCT Nos. P-1863 to P-1867. Conspicuously, TCT Nos. P-1863 to P-1867
cover lots with total land area of 325,159 sq. m.44 Thus, there is merit to respondent's stand that the Register of Deeds
mistakenly mixed-up the entries on the title source of TCT Nos. T-31615 to T-31617, on one hand, and TCT Nos. P-1863 to P-
1867, on the other, since these titles were simultaneously registered on December 12, 1995 at 10:45 a.m.
TCT Nos. P-1863 to P-1867 cover Lots 1 to 5, respectively, of the consolidation and subdivision plan Pcs-04-010666.45 As shown
by the plan, Lots 1-C and 1-B (LRC) Psd 9174 and Lots 1 and 2, Psu-109694 were consolidated and subdivided to form the parcels
of land covered by TCT Nos. P-1863 to 1867. Lots 1-C and 1-B (LRC) Psd 9174 and Lot 1 and 2 Psu-109694 have an area of231,891
sq. m. and 93,268 sq. m., respectively. The sum of both is 325,159 sq. m., which is total area being covered by TCT Nos. P-1863
to P-1867.
Undoubtedly, the origins of TCT Nos. P-1863 to P-1867 are OCT Nos. 0-216 and 55. Whether the 7,693 sq. m. overlapping
portion is actually located in Lots 1-C and 1-B (LRC) Psd 91 74 or in Lots 1 and 2, Psu-1 09694 is no longer material. Either way,
respondent's title over such portion must prevail since OCT No. 0-216 and OCT No. 55 were registered on March 30, 1959 and
July 31, 1941, respectively. In comparison, OCT No. OP-283, which is the mother title of TCT No. P-671 in the name of Bautista,
was registered much later on February 4, 1977.
Having finally settled that respondent is the rightful owner of the contested 7,693 sq. m. portion of the lot covered by TCT No. P-
1863, We now resolve the issue of whether petitioner is a mortgagee in good faith and for value.
According to petitioner, prior to the approval of the loan application of Liezel 's Garments, Inc., the subject property was duly
verified as free from any lien or encumbrance. As a matter of course, the same was inspected for purposes of collateral
valuation. An ocular inspection revealed that there was no person in possession of the same prior to the granting of the loan. It
could not have known or suspected that there was another person claiming the property since the disputed property was
accepted as collateral in August 1994, or before the filing of the case in November 1996, and, by then, there was no annotation
of adverse claim inscribed on the title. Moreover, the overlapped portion is not the same as an encumbrance that would render
the inclusion thereof in the real estate mortgage between Bautista and petitioner null and void.
In general, the issue of whether a mortgagee is in good faith cannot be entertained in a Rule 45 petition. This is because the
ascertainment of good faith or the lack thereof, and the determination of negligence are factual matters which lay outside the
scope af a peti ion for review on certiorari.46 Good faith, or the lack of it, is a question of intention. In ascertaining intention,
courts are necessarily controlled. by the evidence as to the conduct and outward acts by which alone the inward motive may,
with safety, be determined.47 Considering that the RTC was siler1t on the matter while the CA ruled against petitioner, this
Court shall make its own determination.
When the purchaser or the mortgagee is a bank, the rule on innocent purchasers or mortgagees for value is applied more
strictly.48 Being in the business of extending loans secured by real estate mortgage, banks are presumed to be familiar with the
rules on land registration.49 Since the banking business is impressed with public interest, they are expected to be more
cautious, to exercise a higher degree of diligence, care and prudence, than private individuals in their dealings, even those
involving registered lands.50 Banks may not simply rely on the face of the certificate of title.51 Hence, they cannot assume that,
simply because the title offered as security is on its face free of any encumbrances or lien, they are relieved of the responsibility
of taking further steps to verify the title and inspect the properties to be mortgaged.52 As expected, the ascertainment of the
status or condition of a property offered to it as security for a loan must be a standard and indispensable part of a bank's
operations.53 It is of judicial notice that the standard practice for banks before approving a loan is to send its representatives to
the property offered as collateral to assess its actual condition, verify the genuineness of the title, and investigate who is/are its
real owner/s and actual possessors.54cralawrednad
It the instant case, petitioner readily admitted that during the appraisal and inspection of the property on January 11, 1994 it
duly noted the observation that the subject property was traversed by an access road leading to the Tagaytay Highlands Golf
Course. However, it concluded, albeit erroneously, that the access road is still a part of TCT No. P-671 because its existence
cannot be established despite verifications conducted by its property appraisers with the DENR's Land Management Section
Region IV and Tax Mapping Section of the Tagaytay City Assessor's Office due to lack of records of any survey plan delineating
the portion occupied by the said road from the subject property."55cralawrednad
A person who deliberately ignores a significant fact that could create suspicion in an otherwise reasonable person is not a
mortgagee in good faith. A mortgagee cannot close his eyes to facts which should put a reasonable man on his guard and claim
that he acted in good faith under the belief that there was no defect in the title of the mortgagor. His mere refusal to believe
that such defect exists or the willful closing of his eyes to the possibility of the existence of a defect in the mortgagor's title will
not make him an innocent mortgagee for value if it afterwards develops that the title was in fact defective, and it appears that
he had such notice of the defect as would have led to its discovery had he acted with that measure of precaution which may
reasonably be required of a prudent man in a like situation.
Here, the facts show that petitioner disregarded circumstances that should have aroused its suspicion. After encountering a
dead end in the DENR's Land Management Section' Region IV and the Tax Mapping Section of the Tagaytay City Assessor's
Office, it manifestly failed to inquire further on the identity of possible adverse claimants and the status of their occupancy. Had
petitioner earnestly probed, by simply talking to Bautista or asking the possessors/owner of adjacent lots as regards the
presence of the traversing access road, it. could have. easily discovered the opposing claim of respondent, which is a known real
estate developer in the area. Indeed, failing to make such inquiry would hardly be consistent with any pretense of good faith.
Given the suspicious-provoking presence of the concrete road on the mortgaged lot, it behooved petitioner to conduct a more
exhaustive investigation on the history of Bautista's title. The acceptance of the mortgaged property; notwithstanding the
existence of an actual and visible improvement thereon constitutes gross negligence amounting to bad faith.56 Where the
mortgagee acted with haste in granting the mortgage loan and did not ascertain the ownership of the land being mortgaged it
cannot be considered an innocent mortgagee.57cralawrednad
Granting, for the sake of argument, that petitioner is a mortgagee in good faith, still it. cannot be said that it is an innocent
purchaser for value.
A purchaser in good faith is defined as one who buys a property without notice that some other person has a right to, or interest
in, the property and pays full and fair price at the time of purchase or before he has notice of the claim or interest of other
persons in the property.
When a prospective buyer is faced with facts and circumstances as to arouse his suspicion, he must take precautionary steps to
qualify as a purchaser in good faith. In Spouses Mathay v. CA, we determined the duty of a prospective
buyer:ChanRoblesvirtualLawlibrary
Although it is a recognized principle that a person dealing on a registered land need not go beyond its certificate of title, it is also
a firmly settled rule that where there are circumstances which would put a party on guard and prompt him to investigate or
inspect the property being sold to him, such as the presence of occupants/tenants thereon, it is of course, expected from the
purchaser of a valued piece of land to inquire first into the status or nature of possession of the occupants, i.e., whether or not
the occupants possess the land en concepto de dueño, in the concept of the owner. As is the common practice in the real estate
industry, an ocular inspection of the premises involved is a safeguard a cautious and prudent purchaser usually takes. Should he
find out that the land he intends to buy is occupied by anybody else other than the seller who, as in this case, is not in actual
possession, it would then be incumbent upon the purchaser to verify the extent of the occupant's possessory rights. The failure
of a prospective buyer to take such precautionary steps would mean negligence on his part and would thereby preclude him
from claiming or invoking the rights of a purchaser in good faith.58
Even if there was yet no annotated notice of lis pendens at the time the lot covered by TCT P-671 was mortgaged, such notice
already existed when petitioner purchased the lot during the foreclosure sale. The notice of lis pendens was inscribed on TCT P-
671 on November 20, 1996, the same day when Civil Case No. TG-1672 was filed, while the public auction was held on
September 1 0, 1997.59cralawrednad
The foregoing considered, by reason of its bad faith, there is no merit on petitioner's conviction that attorney's fee cannot be
recovered as cost in this case.
One important matter, however. It cannot escape Our notice that the CA ordered Bautista and Liezel's Garments, Inc. to jointly
pay petitioner 16,327,991.40, the amount for which the disputed property was sold to petitioner at public auction. Only the
bank filed a petition for review before Us, which, as expected, did not raise the issue of propriety of such order. This
notwithstanding, We deem it proper to rectify the directive. The Supreme Court is clothed with ample authority to review an
issue, even not assigned as an error on appeal if it finds that its consideration is necessary in arriving at a just decision and
complete resolution of the case or to serve the interests of justice.
It must be emphasized that Bautista, who by now may have already turned 87 years old,60 is considered as a third-party or
accommodation mortgagor. She mortgaged her property to stand as security for the indebtedness of Liezel 's Garments, Inc. She
is not a party to the principal obligation but merely secured the latter by mortgaging her own property. In fact, it was only
Dolores E. Bautista, theh the President and General Manager of Liezel's Garments, Inc., who was the sole signatory of the
Omnibus Credit Line Agreement dated August 16, 1994 and August 30, 199561 as well as the promissory note dated June 30,
1995 and September 30, 1995.62 In Cerna v. Court of Appeals,63 it was held:ChanRoblesvirtualLawlibrary
There is x x x no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of
another's obligation by mortgaging his own property to be solidarily bound with the principal obligor. x x x. The signatory to the
principal contract- loan - remains to be primarily bound. It is only upon the default of the latter that the creditor may have
recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the
loan. And the liability of the third-party mortgagors extends only to the property mortgaged. Should there be any deficiency, the
creditor has recourse on the principal debtor.64
Neither petitioner nor Liezel's Garments, Inc. presented proof that Bautista is a director, officer or employee of Liezel's
Garments, Inc. Although Bautista acted as such, it is a basic rule that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and from the people comprising it, who, in general, are
not personally liable for obligations incurred by the corporation unless the veil of corporate fiction is pierced to justify that it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention
of statutes, or to confuse legitimate issues.65cralawrednad
WHEREFORE, premises considered, the petition is DENIED. The November 23, 2011 Decision and January 17, 2013 Resolution of
the Court of Appeals in CA-G.R. CV No. 84075, which annulled the April 12, 2004 Decision of the Regional Trial Court, Branch 18,
Tagaytay City, Cavite, in Civil Case No. TG-1672, are hereby AFFIRMED WITH MODIFICATION. Only Liezel 's Garments, Inc. is
liable to pay petitioner with the amount of P16,327,991.40, which represents the sum for which the disputed property was sold
to petitioner at public auction.
SO ORDERED.chanrobles virtuallawlibrary
Velasco, Jr., (Chairperson), Villarama, Jr. Perez*, and Jardeleza, JJ., concur.
Endnotes:
* Designated Acting Member in lieu of Associate Justice Bienvenido L. Reyes, per Special Order No. 2112 dated July 16, 2015.
1 Penned by Associate Justice Rodil V. Zalameda, with Associate Justices Rebecca De Quia- Salvador and Normandie B. Pizarro
concurring; rollo, pp. 34-66.
5 Id. at 284-0.
6 ld at 284-E.
8 Id at 256-257.
9 Id. at 258-259.
10 Id. at 260-261.
11 Id. at 262-263.
12 Id. at 287.
13 Id. at 266-267.
14 Id at 233-242.
15 Id. at 71-81.
18 Id. at 342-356.
19 Id. at 401.
20 Id. at 412-418.
21 Id. at 427-435.
23 Id. at 545-546.
24 Id. at 448-451.
29 Id. at 18.
30 Engr. Rogelio Robang (Technical Assistant to the President of respondent), Reynaldo Dy-Reyes (Land Registration Examiner of
the Register of Deeds of Tagaytay City) and Engr. Robert C. Pangyarihan (Chief of the Surveys Division-Land Management Sector
of DENR Region IV).
32 Id. at 257.
33 Id. at 259.
34 Id. at 261.
35 Id. at 271-272.
36 Id. at274.
37 Id. at 275-277.
38 Id. at 278-280.
39 Id. at 280.
40 Id.
41 Id. at 263.
42 Id. at 268-270.
43 Id. at 267.
44 The land areas of TCT Nos. P-1863 to P-1867 are 313,951 sq. m., 1,465 sq. 111. 124 sq. m., 2,378 sq. m., and 7,241 sq. m.,
respectively.
45 Records, p. 284.
46 Arguelles v. Malarayat Rural Bank, Inc., G.R. No. 200468, March 19, 2014, 719 SCRA 563, 571 and Land Bank of the Philippines
v. Poblete, G.R. No. 196577, February 25, 2013, 691 SCRA 613, 625.
48Heirs of Gregorio Lopez v. Development Bank of the Philippines, G.R. No. 193551, November 19, 2014.
50 Heirs of Gregorio Lopez v. Development Bank of the Philippines, G.R. No. 193551, November 19, 2014; Arguelles v. Malarayat
Rural Bank, Inc., supra note 46, at 573; and PNB v. Corpuz, 626 Phil. 410, 413 (2010).
51Heirs of Gregorio Lopez v. Development Bank of the Philippines, G.R. No. 193551, November 19, 2014.
53 Philippine Amanah Bank (now AI-Amanah Islamic Investment Bank of the Philippines, also known as Islamic Bank) v.
Contreras:, G.R. No. 173168, September 29, 2014, 736 SCRA 567, 580.
54Land Bank of the Philippines v. Poblete, supra note 46, at 627; Alana v. Planter's Development Bank, 667 Phil. 81, 89-90
(2011); Philippine National Bank v. Corpuz, 626 Phil. 410, 413 (20 I 0); Erasusta, Jr. v. Court of Appeals, 527 Phil. 639, 651 (2006);
and PNB v. Heirs of Militar, 504 Phil. 634, 644 (2005).
55 CA rollo, p. 208.
57 See Arguelles v. Malarayat Rural Bank, Inc., supra note 46, at 576, citing Land Bank of the Philippines v. Poblete, supra note
46, at 628.
58Homeowners Savings and Loan Bank v. Felonia, G.R. No. 189477, February 26, 2014, 717 SCRA 358, 367-368.
62 Id. at 448-451.
64 Cerna v. Court of Appeals, supra, at 522-523, as cited in Bank of America v. American Realty Corp., 378 Phil. 1279, 1291
(1999).
65Heirs of Fe Tan Uy v. International Exchange Bank, G.R. No. 166282, February 13, 2013, SCRA 519, 525-526.