oblicon 2nd exam full txt part 2

7/25/2019 Oblicon 2nd Exam Full Txt Part 2

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APPLICATION OF PAYMENT

THIRD DIVISION

G.R. No. 176246 February 13, 2009

PREMIERE DEVELOPMENT BANK,Petitioner,

vs.

CENTRAL SURETY & INSURANCE COMPANY, INC.,Respondent.

D E C I S I O N

NACHURA, J.:

Before us is a petition for review on certiorari assailing the Court of Appeals (CA) Decision1in CA-G.R. CV No. 85930, which reversed

and set aside the decision of the Regional Trial Court (RTC), Branch 132, Makati City in Civil Case No. 0051306.2

On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety) obtained an industrial loan of P6,000,000.00

from petitioner Premiere Development Bank (Premiere Bank) with a maturity date of August 14, 2000. This P6,000,000.00 loan,

evidenced by Promissory Note (PN) No. 714-Y,3stipulates payment of 17% interest per annum payable monthly in arrears and the

principal payable on due date. In addition, PN No. 714-Y provides for a penalty charge of 24% interest per annum based on the

unpaid amortization/installment or the entire unpaid balance of the loan. In all, should Central Surety fail to pay, it would be liable

to Premiere Bank for: (1) unpaid interest up to maturity date; (2) unpaid penalties up to maturity date; and (3) unpaid balance of the

principal.

To secure payment of the P6,000,000.00 loan, Central Surety executed in favor of Premiere Bank a Deed of Assignment with Pledge4

covering Central Suretys Membership Fee Certificate No. 217 representing its proprietary share in Wack Wack Golf and Country

Club Incorporated (Wack Wack Membership). In both PN No. 714-Y and Deed of Assignment, Constancio T. Castaeda, Jr. and

Engracio T. Castaeda, president and vice-president of Central Surety, respectively, represented Central Surety and solidarily bound

themselves to the payment of the obligation.

Parenthetically, Central Surety had another commercial loan with Premiere Bank in the amount of P40,898,000.00 maturing on

October 10, 2001. This loan was, likewise, evidenced by a PN numbered 376-X5and secured by a real estate mortgage over

Condominium Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of through a renewal of Central Suretys prior loanthen covered by PN No. 367-Z.

6As with the P6,000,000.00 loan and the constituted pledge over the Wack Wack Membership, the

P40,898,000.00 loan with real estate mortgage was transacted by Constancio and Engracio Castaeda on behalf of Central Surety.

It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding payment of the P6,000,000.00 loan, to

wit:

August 22, 2000

CENTRAL SURETY AND INSURANCE CO.2nd Floor Universalre Bldg.

No. 106 Paseo de Roxas, Legaspi Village

Makati City

Attention: Mr. Constancio T. Castaneda, Jr.

President

Mr. Engracio T. Castaneda

Vice President

-------------------------------------------------

Gentlemen:
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CENTRAL SURETY & INSURANCE CO.

By: Constancio T. Castaeda Jr.President

Engracio T. CastaedaVice President

2nd Floor Universalre Bldg. No. 106

Paseo de Roxas, Legaspi Village, Makati City

RE: YOUR COMMERCIAL LOAN OF P40,898,000.00 &

P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK

UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y

**************************************************

Dear Sirs:

We write on behalf of our client, Premiere Development Bank, in connection with your above-captioned loan account.

While our client has given you all the concessions, facilities and opportunities to service your loans, we regret to inform you that you

have failed to settle the same despite their past due status.

In view of the foregoing and to protect the interest of our client, please be advised that unless the outstanding balances of your loan

accounts as of date plus interest, penalties and other fees and charges are paid in full or necessary arrangements acceptable to our

client is made by you within ten (10) days from date hereof, we shall be constrained much to our regret, to file foreclosureproceedings against the collateral of the loan mortgaged to the Bank or pursue such action necessary in the premises.

We trust, therefore, that you will give this matter your preferential attention.

Very truly yours,

(sgd.)

PACITA M. ARAOS12

(italics supplied)

The very next day, on September 29, 2000, Central Surety, through its counsel, wrote Premiere Bank and re-tendered payment of

the check:

29 September 2000

PREMIERE BANK

EDSA cor. Magallanes Avenue

Makati City

Attention: Mr. Ignacio R. Nebrida, Jr.

Senior Asst. Vice President/Business Development GroupHead

Re : Promissory Note No. 714-Y

Sir:

This is further to our clients letter to you dated 24 August 2000, informing you that it would settle its account by the end of

September 2000.

Please be advised that on 20 September 2000 our client delivered to your bank BC cheque no. 08114 payable to Premiere Bank in

the amount of SIX MILLION PESOS (P6,000,000.00), which was received by your Senior Account Manager, Ms. Evangeline Veloira.

However, for unexplained reasons the cheque was returned to us.
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We are again tendering to you the said cheque of SIX MILLION PESOS (P6,000,000.00), in payment of PN#714-Y. Please accept the

cheque and issue the corresponding receipt thereof. Should you again refuse to accept this cheque, then I shall advise my client to

deposit it in court for proper disposition.

Thank you.

Very truly yours,

(sgd.)

EPIFANIO E. CUACounsel for Central Surety & Insurance Company

13

(italics supplied)

On even date, a separate letter with another BC Check No. 08115 in the amount of P2,600,000.00 was also tendered to Premiere

Bank as payment for the Spouses Engracio and Lourdes Castaedas (Spouses Castaedas) personal loan covered by PN No. 717-X

and secured by Manila Polo Club, Inc. membership shares.

On October 13, 2000, Premiere Bank responded and signified acceptance of Central Suretys checks under the following applicat ion

of payments:

13 October 2000

ATTY. EPIFANIO E. CUA

2/F Universalre Condominium

106 Paseo de Roxas

Legaspi Village, Makati City

Dear Atty. Cua:

Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients with the enclosed check nos. 0008114

and 0008115 for the total of P8,600,000.00.

As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as full settlement of the obligation under

Account Nos. PN #714-Y and PN # 717-X, as the amount is insufficient.

In accordance with the terms and conditions of the Promissory Notes executed by your clients in favor of Premiere DevelopmentBank, we have applied the two (2) checks to the due obligations of your clients as follows:

1) Account No.: COM 235-Z14

P1,044,939.45

2) Account No.: IND 717-X P1,459,693.15

3) Account No.: COM 367-Z15

P4,476,200.18

4) Account No.: COM 714-Y P1,619,187.22

TOTAL P8,600,000.00

We are enclosing Xerox copy each of four (4) official receipts covering the above payments. The originals are with us which your

clients or their duly authorized representative may pick-up anytime during office hours.

We shall appreciate the settlement in full of the accounts of your client or necessary arrangements for settlement thereof be made

as soon as possible to put the accounts on up to-date status.

Thank you.
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Very truly yours,

(sgd.)

MS. ELSA M. SAPAPO

Manager

Loans Accounting andControl Department

16

Significantly, the P8,600,000.00 check payments were not applied in full to Central Suretys P6,000,000.00 loan under PN No. 714-Y

and the Spouses Castaedas personal loan of P2,600,000.00 under PN No. 717-X. Premiere Bank also applied proceeds thereof to acommercial loan under PN No. 235-Z taken out by Casent Realty and Development Corporation (Casent Realty),

17and to Central

Suretys loan originally covered by PN No. 367-Z, renewed under PN No. 376-X, maturing on October 20, 2001.

Strongly objecting to Premiere Banks application of payments, Central Suretys counsel wrote Premiere Bank and reiterated Central

Suretys demand for the application of the check payments to the loans covered by PN Nos. 714-X and 714-Y. Additionally, Central

Surety asked that the Wack Wack Membership pledge, the security for the P6,000,000.00 loan, should be released.

In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-LGC, Atty. Pacita Araos, responded and

refused to accede to Central Suretys demand. Premiere Bank insisted that the PN covering the P6,000,000.00 loan granted Premiere

Bank sole discretion respecting: (1) debts to which payments should be applied in cases of several obligations by an obligor and/ordebtor; and (2) the initial application of payments to other costs, advances, expenses, and past due interest stipulated thereunder.

As a result, Central Surety filed a complaint for damages and release of security collateral, specifically praying that the court renderjudgment: (1) declaring Central Suretys P6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2) ordering Premiere Bank to

release to Central Surety its membership certificate of shares in Wack Wack; (3) ordering Premiere Bank to pay Central Surety

compensatory and actual damages, exemplary damages, attorneys fees, and expenses of litigation; and (4) directing Premiere Bank

to pay the cost of suit.

On July 12, 2005, the RTC rendered a decision dismissing Central Suretys complaint and ordering it to payPremiere Bank

P100,000.00 as attorneys fees. The RTC ruled that the stipulation in the PN granting Premiere Bank sole discretion in the app licationof payments, although it partook of a contract of adhesion, was valid. It disposed of the case, to wit:

Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right in contending that it had the right to

apply *Central Suretys+ payment to the most onerous obligation or to the one it sees fit to be paid first from among the severalobligations. The application of the payment to the other two loans of Central Surety namely, account nos. COM 367-Z and IND 714-Y

was within *Premiere Banks+ valid exercise of its right according the stipulation.lawphil.netHowever, [Premiere Bank] erred in

applying the payment to the loan of Casent Realty and to the personal obligation of Mr. Engracio Castaeda despite their connectionwith one another. Therefore, [Premiere Bank] cannot apply the payment tendered by Central Surety to the other two e ntities

capriciously and expressly violating the law and pertinent Central Bank rules and regulations. Hence, the application of the payment

to the loan of Casent Realty (Account No. COM 236-Z) and to the loan of Mr. Engracio Castaeda (Account No. IND 717-X) is void and

must be annulled.

As to the issue of whether or not [Central Surety] is entitled to the release of Membership Fee Certificate in the Wack Wack Golf and

Country Club, considering now that [Central Surety] cannot compel [Premiere Bank] to release the subject collateral.

With regard to the issue of damages and attorneys fees, the court finds no basis to grant *Premiere Banks+ prayer for moralandexemplary damages but deems it just and equitable to award in its favor attorneys fees in the sum of Php 100,000.00.

WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering [Central Surety] to pay [Premiere Bank] Php

100,000.00 as attorneys fees.18

(emphasis supplied)

On appeal by Central Surety, the CA reversed and set aside the trial courts ruling. The appellate court held that with Premiere

Banks letter dated August 22, 2000 specifically demanding payment of Central Suretys P6,000,000.00 loan, it was deemed to have

waived the stipulation in PN No. 714-Y granting it the right to solely determine application of payments, and was, consequently,

estopped from enforcing the same. In this regard, with the holding of full settlement of Central Suretys P6,000,000.00 loan underPN No. 714-Y, the CA ordered the release of the Wack Wack Membership pledged to Premiere Bank.
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Hence, this recourse by Premiere Bank positing the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE AND PALPABLE ERROR WHEN IT APPLIED THE

PRINCIPLE OF WAIVER AND ESTOPPEL IN THE PRESENT CASE INSOFAR AS THE DEMAND LETTER SENT TO [CENTRAL SURETY] IS

CONCERNED NULLIFYING THE APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE BANK]

WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE HONORABLE COURT OF APPEALS COULD PREVAIL OVER THE

CLEAR AND UNMISTAKABLE STATUTORY AND CONTRACTUAL RIGHT OF [PREMIERE BANK] TO EXERCISE APPLICATION OF PAYMENT

AS WARRANTED BY THE PROMISSORY NOTE

EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO THE SUBJECT LOAN OF RESPONDENT, WHETHER OR NOT

THE SUBJECT WACK-WACK SHARES COULD BE RELEASE[D] DESPITE THE CROSS DEFAULT AND CROSS GUARANTEE PROVISIONS OF

THE DEED OF ASSIGNMENT WITH PLEDGE AND RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY [CENTRAL SURETY],CASENT REALTY AND SPS. CASTAEDA.

WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND CONSIGNATION OF THE SUBJECT TWO CHECK PAYMENTS BY[CENTRAL SURETY].

WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL SURETY] IS ESTOPPED FROM CONTESTING THESTIPULATIONS OR PROVISIONS OF THE PROMISSORY NOTES AUTHORIZING [PREMIERE BANK] TO MAKE SUCH APPLICATION OF

PAYMENTS

WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE BANK] IS ENTITLED TO AN AWARD OF DAMAGES ASOCCASIONED BY THE MALICIOUS FILING OF THIS SUIT.

19

At the outset, we qualify that this case deals only with the extinguishment of Central Suretys P6,000,000.00 loan secured by theWack Wack Membership pledge. We do not dispose herein the matter of the P2,600,000.00 loan covered by PN No. 717-X subject of

BC Check No. 08115.

We note that both lower courts were one in annulling Premiere Banks application of payments to the loans of Casent Realty and the

Spouses Castaeda under PN Nos. 235-Z and 717-X, respectively, thus:

It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership certificate are only Central Surety, as debtor

and [Premiere Bank], as creditor. Thus, when the questioned stipulation speaks of "several obligations", it only refers to th eobligations of [Central Surety] and nobody else.

[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No. 714-Ysecured by Wack Wack membershipcertificate; and 2.) Account No. 367-Zsecured by Condominium Certificate of Title. The two loans are secured by separate and

different collaterals. The collateral for Account No. 714-Y, which is the Wack Wack membership certificate answers only for that

account and nothing else. The collateral for Account No. 367-Z, which is the Condominium Certificate of Title, is answerable only for

the said account.

The fact that the loan obligations of [Central Surety] are secured by separate and distinct collateral simply shows that each collateral

secures only a particular loan obligation and does not cover loans including future loans or advancements.

As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty, not by [Central Surety]. Although Mr.Engracio Castaeda is the vice-president of [Central Surety], and president of Casent Realty, it does not follow that the twocorporations are one and the same. Both are invested by law with a personality separate and distinct from each other.

Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent evidence showing that the latter is being used

to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues, orwhen it is merely an adjunct, a business conduit or an alter ego of [Central Surety] or of another corporation; or used as a cloak to

cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or for the protection of creditors.1avvphi1

Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses Castaeda under Account No. IND 717-X.

Settled is the rule that a corporation is invested by law with a personality separate and distinct from those of the persons composing
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it. The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholders debt or credit that ofthe

corporation.

The mere fact that a person is a president of the corporation does not render the property he owns or possesses the property of the

corporation, since that president, as an individual, and the corporation are separate entities.20

In fact, Premiere Bank did not appeal or question the RTCs ruling specifically annulling the application of the P6,000,000.00 check

payment to the respective loans of Casent Realty and the Spouses Castaeda. Undoubtedly, Premiere Bank cannot be allowed,

through this petition, to surreptitiously include the validity of its application of payments concerning the loans to Casent Realty and

the Spouses Castaeda.

Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:

1. Whether Premiere Bank waived its right of application of payments on the loans of Central Surety.

2. In the alternative, whether the P6,000,000.00 loan of Central Surety was extinguished by the encashment of BC CheckNo. 08114.

3. Corollarily, whether the release of the Wack Wack Membership pledge is in order.

The Petition is meritorious.

We shall take the first and the second issues in tandem.

Creditor given right to apply payments

At the hub of the controversy is the statutory provision on application of payments, specifically Article 1252 of the Civil Code, viz.:

Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of makingthe 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 thesame, unless there is a cause for invalidating the contract.

The debtors right to apply payment is not mandatory. This is clear from the use of the word "may" rather than the word "shall" inthe provision which reads: "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 the same must be applied."

Indeed, the debtors right to apply payment has been considered merely directory, and not mandatory,21

following this Courts

earlier pronouncement that "the ordinary acceptation of the terms may and shall may be resorted to as guides in ascertaining the

mandatory or directory character of statutory provisions."22

Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular payment that he tenders to

the creditor. But likewise granted in the same provision is the right of the creditor to apply such payment in case the debtor fails todirect its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the creditor a receipt in which an

application of payment is made, the former cannot complain of the same." It is the directory nature of this right and the subsidiary

right of the creditor to apply payments when the debtor does not elect to do so that make this right, like any other right, waivable.

Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals or good customs, or prejudicial to a

third person with a right recognized by law.23

A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever account he chooses,

unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who may make such

application as he chooses. But if neither party has exercised its option, the court will ap ply the payment according to the justice and

equity of the case, taking into consideration all its circumstances.24
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Verily, the debtors right to apply payment can be waived and even granted to the creditor if the debtor so agrees.25

This was

explained by former Senator Arturo M. Tolentino, an acknowledged expert on t he Civil Code, thus:

The following are some limitations on the right of the debtor to apply his payment:

x x x x

5) when there is an agreement as to the debts which are to be paid first, the debtor cannot vary this agreement.26

Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was held that:

The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978 loan. Planters refused. Planters notes itwas expressly provided in the security agreement on the 1981 loan that Planters had a legal right to direct application of payments

in its sole discretion. Appellees do not refute this. Hence, the debtors had no right by agreement to direct the payments. This also

precludes the application of the U.S. Rule, which applies only in absence of a statute or specific agreement. Thus the trial court

erred. Planters was entitled to apply the Hi-Plains payments as it saw fit.27

In the case at bench, the records show that Premiere Bank and Central Surety entered into several contracts of loan, securities by

way of pledges, and suretyship agreements. In at least two (2) promissory notes between the parties, Promissory Note No. 714-Yand Promissory Note No. 376-X, Central Surety expressly agreed to grant Premiere Bank the authority to apply any and all of Central

Suretys payments, thus:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without notice and i n

any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due or not. Any such

application of deposits or payments shall be conclusive and binding upon us.

This proviso is representative of all the other Promissory Notes involved in this case. It is in the exercise of this express authority

under the Promissory Notes, and following Bangko Sentral ng Pilipinas Regulations, that Premiere Bank applied payments made by

Central Surety, as it deemed fit, to the several debts of the latter.

All debts were due; There was no

waiver on the part of petitioner

Undoubtedly, at the time of conflict between the parties material to this case, Promissory Note No. 714-Y dated August 20, 1999, inthe amount of P6,000,000.00 and secured by the pledge of the Wack Wack Membership, was past the due and demand stage. By its

terms, Premiere Bank was entitled to declare said Note and all sums payable thereunder immediately due and payable, without

need of "presentment, demand, protest or notice of any kind." The subsequent demand made by Premiere Bank was, therefore,merely a superfluity, which cannot be equated with a waiver of the right to demand payment of all the matured obligations of

Central Surety to Premiere Bank.

Moreover, this Court may take judicial notice that the standard practice in commercial transactions to send demand letters has

become part and parcel of every collection effort, especially in light of the legal requirement that demand is a prerequisite before

default may set in, subject to certain well-known exceptions, including the situation where the law or the obligations expressly

declare it unnecessary.28

Neither can it be said that Premiere Bank waived its right to apply payments when it specifically demanded payment of theP6,000,000.00 loan under Promissory Note No. 714-Y. It is an elementary rule that the existence of a waiver must be positivelydemonstrated since a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but

must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences.

There must be persuasive evidence to show an actual intention to relinquish the right. Mere silence on the part of the holder of the

right should not be construed as a surrender thereof; the courts must indulge every reasonable presumption against the existenceand validity of such waiver.

29

Besides, in this case, any inference of a waiver of Premiere Banks, as creditor, right to apply payments is eschewed by the expressprovision of the Promissory Note that: "no failure on the part of [Premiere Bank] to exercise, and no delay in exercising any right

hereunder, shall operate as a waiver thereof."
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Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver that the Court of Appeals ascr ibed to the

demand made by Premiere Bank upon Central Surety to pay the amount of P6,000,000.00, in the face of both the express provisions

of the law and the agreements entered into by the parties. After all, a diligent creditor should not needlessly be interfered with in

the prosecution of his legal remedies.30

When Central Surety directed the application of its payment to a specific debt, it knew it had another debt with Premiere Bank, thatcovered by Promissory Note 367-Z, which had been renewed under Promissory Note 376-X, in the amount of P40.898 Million.

Central Surety is aware that Promissory Note 367-Z (or 376-X) contains the same provision as in Promissory Note No 714-Y which

grants the Premiere Bank authority to apply payments made by Central Surety, viz.:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without notice and in

any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due or not. Any such

application of deposits or payments shall be conclusive and binding upon us.31

Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso that:

the bank shall be entitled to declare this Note and all sums payable hereunder to be immediately due and payable, without nee d of

presentment, demand, protest or notice of nay kind, all of which I/We hereby expressly waive, upon occurrence of any of the

following events: x x x (ii) My/Our failure to pay any amortization or installment due hereunder; (iii) My/Our failure to pay money

due under any other document or agreement evidencing obligations for borrowed money x x x.32

by virtue of which, it follows that the obligation under Promissory Note 367-Z had become past due and demandable, with furthernotice expressly waived, when Central Surety defaulted on its obligations under Promissory Note No. 714-Y.

Mendoza v. Court of Appeals33

forecloses any doubt that an acceleration clause is valid and produces legal effects. In fact, in Selegna

Management and Development Corporation v. United Coconut Planters Bank,34

we held that:

Considering that the contract is the law between the parties, respondent is justified in invoking the acceleration clause declaring t he

entire obligation immediately due and payable. That clause obliged petitioners to pay the entire loan on January 29, 1999, th e date

fixed by respondent.

It is worth noting that after the delayed payment of P6,000,000.00 was tendered by Central Surety, Premiere Bank returned the

amount as insufficient, ostensibly because there was, at least, another account that was likewise due. Obviously, in its demand of 28

September 2000, petitioner sought payment, not just of the P6,000,000.00, but of all these past due accounts. There is extanttestimony to support this claim, as the transcript of stenographic notes on the testimony of Atty. Araos reveals:

Atty. Opinion: Q. But you accepted this payment of Six Million (P6,000,000.00) later on when together with this was paid another

check for 1.8 Million?

Witness: A. We accepted.

Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or to four (4) accounts mentioned in

Exhibit "J." Is that correct?

Atty. Tagalog: We can stipulate on that. Your Honor.

Court: This was stipulated?

Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those are the applications of payments made

by the defendant Bank on those loan accounts.

Atty. Opinion: Q. Were these accounts due already when you made this application, distribution of payments?

Witness: A. Yes sir.35
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Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on the payment of its obligations. In fact,

the record shows that after marking its evidence, Central Surety proceeded to offer its evidence immediately. Only on the rebuttal

stage did Central Surety present a witness; but even then, no evidence was adduced of payment of any other obligation. In this light,

the Court is constrained to rule that all obligations of Central Surety to Premiere Bank were due; and thus, the application of

payments was warranted.

Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its more onerous obligations, Premiere

Bank cannot be faulted for exercising the authority granted to it under the Promissory Notes, and applying payment to the

obligations as it deemed fit. Subject to the caveat that our ruling herein shall be limited only to the transactions entered into by the

parties to this case, the Court will not disturb the finding of the lower court that Premiere Bank rightly applied the payments thatCentral Surety had tendered. Corollary thereto, and upon the second issue, the tender of the amount of P6,000,000.00 by Central

Surety, and the encashment of BC Check No. 08114 did not totally extinguish the debt covered by PN No. 714-Y.

Release of the pledged

Wack Wack Membership

Contract of Adhesion

To the extent that the subject promissory notes were prepared by the Premiere Bank and presented to Central Surety for signature,

these agreements were, indeed, contracts of adhesion. But contracts of adhesion are not invalid per se. Contracts of adhesion,

where one party imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to thecontract is, in reality, free to reject it entirely; if he adheres, he gives his consent.

In interpreting such contracts, however, courts are expected to observe greater vigilance in order to shield the unwary or weaker

party from deceptive schemes contained in ready-made covenants.36

Thus, Article 24 of the Civil Code pertinently states:

In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence,

ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his protection.

But in this case, Central Surety does not appear so weak as to be placed at a distinct disadvantage vis--vis the bank. As found by the

lower court:

Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in assuming that the [Central Sur ety]could not have been cheated or misled in agreeing thereto, it could have negotiated with the bank on a more favorable term

considering that it has already established a certain reputation with the [Premiere Bank] as evidenced by its numerous transactions.

It is therefore absurd that an established company such as the [Central Surety] has no knowledge of the law regarding bank practice

in loan transactions.

The Dragnet Clause.

The factual circumstances of this case showing the chain of transactions and long-standing relationship between Premiere Bank and

Central Surety militate against the latters prayer in its complaint for the release of the Wack Wack Membership, the securit y

attached to Promissory Note 714-Y.

A tally of the facts shows the following transactions between Premiere Bank and Central Surety:

Date Instrument Amountcovered

Stipulation

August 20, 1999 PN 714-Y P 6 M

August 29, 1999 Deed of

Assignment

P 15 M As security for PN 714-Y and/or

such Promissory Note/s which the
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with Pledge ASSIGNOR / PLEDGOR shall

hereafter execute in favor of the

ASSIGNEE/PLEDGEE

From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear that the security, which peculiarlyspecified an amount at P15,000,000.00 (notably greater than the amount of the promissory note it secured), was intended to

guarantee not just the obligation under PN 714-Y, but also future advances. Thus, the said deed is explicit:

As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the amount of FIFTEENMILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note attached hereto and made an integral

part hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall hereafter execute in favor of theASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR hereby transfers, assigns, conveys, endorses, encumbers and delivers by way of first

pledge unto the ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share in Wack Wack Golf

and Country Club Incorporate covered by Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and Country

Club Incorporated on August 27, 1996 in the name of the ASSIGNOR." (Emphasis made in the Petition.)

Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by Central Surety as follows:

Date Instrument Amount Stipulation

Notarized, Sept.

22, 1999

Continuing

Guaranty/ComprehensiveSurety Agreement

P40,898,000.00 In consideration of the loan

and/or any creditaccommodation which you

(petitioner) have extended

and/or will extend to CentralSurety and Insurance Co.

And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior Promissory Note 367-Z, in the amount of

P40,898,000.00. In all, the transactions that transpired between Premiere Bank and Central Surety manifest themselves, thusly:

DateInstrument

Amount

coveredStipulation

August 20, 1999 PN 714-Y P 6 M

August 29, 1999 Deed of Assignment with

Pledge

P 15 M As security for PN 714-Y and/or

such Promissory Note/s which the

ASSIGNOR / PLEDGOR shall

hereafter execute in favor of the

ASSIGNEE/PLEDGEE

Notarized,

Sept. 22, 1999

Continuing

Guaranty/Comprehensive

Surety Agreement

P40,898,000.00 In consideration of the loan and/or

any credit accommodation which

you (petitioner) have extended

and/or will extend to CentralSurety and Insurance Co.

October 10, 2000 Promissory Note 376-X (PN

367-Z)

P40,898,000.00

From the foregoing, it is more than apparent that when, on August 29, 1999, the parties executed the Deed of Assignment with

Pledge (of the Wack Wack Membership), to serve as security for an obligation in the amount of P15,000,000.00 (when the actual

loan covered by PN No. 714-Y was only P6,000,000.00), the intent of the parties was for the Wack Wack Membership to serve assecurity also for future advancements. The subsequent loan was nothing more than a fulfillment of the intention of the parties. Of

course, because the subsequent loan was for a much greater amount (P40,898,000.00), it became necessary to put up another


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security, in addition to the Wack Wack Membership. Thus, the subsequent surety agreement and the specific security for PN No.

367-X were, like the Wack Wack Membership, meant to secure the ballooning debt of the Central Surety.

The above-quoted provision in the Deed of Assignment, also known as the "dragnet clause" in American jurisprudence, would

subsume all debts of respondent of past and future origins. It is a valid and legal undertaking, and the amounts specified as

consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security, if from the four cornersof the instrument, the intent to secure future and other indebtedness can be gathered. A pledge or mortgage given to secure future

advancements is a continuing security and is not discharged by the repayment of the amount named in the mortgage until the full

amount of all advancements shall have been paid.37

Our ruling in Prudential Bank v. Alviar38

is instructive:

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased tosubsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed." Mortgages of th is

character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the

time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A "dragnet clause"

operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to

execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et

cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal

contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand assecurity if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the

Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the paymentof the

same andthose that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand(P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,

including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as

appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage

unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this

document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be

erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all lie ns and

incumbrances. . . .

x x x x

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345, executed

by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN BD#76/C-430, executed by respondents

for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two

promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattelmortgage on various heavy and transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the

critical issue is whether the "blanket mortgage" clause applies even to subsequent advancements for which other securities were

intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a "dragnet

clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to

cover a different debt, although such other debt is secured by another mortgage. The contrary thinking maintains that a mortgagewith such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything

other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of

the mortgage, in the absence of a special contract excluding it from the arrangement.

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or "dragnet clause,"

it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other

securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is acorollary component of the "dragnet clause." But of course, there is no prohibition, as in the mortgage contract in issue, against

contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another
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To recall, the critical issue resolved in Prudential was whether the "blanket mortgage" clause applies even to subsequent

advancements for which other securities were intended. We then declared that the special security for subsequent loans must first

be exhausted in a situation where the creditor desires to foreclose on the "subsequent" loans that are due. However, the "dragnet

clause" allows the creditor to hold on to the first security in case of deficiency after foreclosure on the special security for the

subsequent loans.

In Prudential, we disallowed the petitioners attempt at multiple foreclosures, as it foreclosed on all of the mortgaged properties

serving as individual securities for each of the three loans. This Court then laid down the rule, thus:

where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, abalance due on a note, after exhausting the special security given for the payment of such note, was, in the absence of a special

agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security. This is

recognition that while the "dragnet clause" subsists, the security specifically executed for subsequent loans must first be exhausted

before the mortgaged property can be resorted to.

However, this does not prevent the creditor from foreclosing on the security for the first loan if that loan is past due, because there

is nothing in law that prohibits the exercise of that right. Hence, in the case at bench, Premiere Bank has the right to foreclose on the

Wack Wack Membership, the security corresponding to the first promissory note, with the deed of assignment that originated th e

"dragnet clause." This conforms to the doctrine in Prudential, as, in fact, acknowledged in the decisions penultimate paragraph, viz.:

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have not y et paid

the P250,000.00 and gave no credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus,the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and asmentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/c-345, has been exhausted, subject of course to

defenses which are available to respondents.

In any event, even without this Courts prescription in Prudential, the release of the Wack Wack Membership as the pledged securityfor Promissory Note 714-Y cannot yet be done as sought by Central Surety. The chain of contracts concluded between Premiere

Bank and Central Surety reveals that the Wack Wack Membership, which stood as security for Promissory Note 714-Y, and which

also stands as security for subsequent debts of Central Surety, is a security in the form of a pledge. Its return to Central Surety upon

the pretext that Central Surety is entitled to pay only the obligation in Promissory Note No. 714-Y, will result in the extinguishment

of the pledge, even with respect to the subsequent obligations, because Article 2110 of the Civil Code provides:

(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary is void.

This is contrary to the express agreement of the parties, something which Central Surety wants this Court to undo. We reiterate

that, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if they consented to thesame freely and voluntarily.

39

Attorneys Fees

The final issue is the propriety of attorneys fees. The trial court based its award on the supposed malice of Central Surety in

instituting this case against Premiere Bank. We find no malice on the part of Central Surety; indeed, we are convinced that Central

Surety filed the case in the lower court in good faith, upon the honest belief that it had the prerogative to choose to which loan itspayments should be applied.

Malicious prosecution, both in criminal and civil cases, requires the presence of two elements, to wit: (a) malice and (b) absence of

probable cause. Moreover, there must be proof that the prosecution was prompted by a sinister design to vex and humiliate a

person; and that it was initiated deliberately, knowing that the charge was false and baseless. Hence, the mere filing of what turns

out to be an unsuccessful suit does not render a person liable for malicious prosecution, for the law could not have meant to impose

a penalty on the right to litigate.40

Malice must be proved with clear and convincing evidence, which we find wanting in this case.

WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. CV No. 85930

dated July 31, 2006, as well as its Resolution dated January 4, 2007, are REVERSED and SET ASIDE. The Decision of the Regional Trial

Court of Makati City, Branch 132, in Civil Case No. 00-1536, dated July 12, 2005, is REINSTATED with the MODIFICATION that theaward of attorneys fees to petitioner is DELETED. No pronouncement as to costs.
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SO ORDERED.

G.R. No. 116805 June 22, 2000

MARIO S. ESPINA, petitioner,

vs.

THE COURT OF APPEALS and RENE G. DIAZ, respondents.

PARDO, J.:

The case before the Court is an appeal from a decision of the Court of Appeals 1 reversing that of the Regional Trial Court, Antipolo,

Rizal, 2 affirming in all respects the decision of the Municipal Trial Court, Antipolo, Rizal, 3 ordering respondent Rene G. Diaz to

vacate the condominium unit owned by petitioner and to pay back current rentals, attorney's fees and costs.1wphi1.nt

The facts, as found by the Court of Appeals, are as follows:

Mario S. Espina is the registered owner of a Condominium Unit No. 403, Victoria Valley Condominium, Valley Golf Subdivision,

Antipolo, Rizal. Such ownership is evidenced by Condominium Certificate of Title No. N-10 (p. 31, Rollo).

On November 29, 1991, Mario S. Espina, the private respondent as seller, and Rene G. Diaz, the petitioner as buyer, executed a

Provisional Deed of Sale, whereby the former sold to the latter the aforesaid condominium unit for the amount of P100,000.00 to be

paid upon the execution of the contract and the balance to be paid through PCI Bank postdated checks as follows:

1. P400,000.00

Check No. 301245

January 15, 1992

2. P200,000.00

Check No. 301246

February 1, 1992


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3. P200,000.00

Check No. 301247

February 22, 1992

4. P200,000.00

Check No. 301248

March 14, 1992

5. P200,000.00

Check No. 301249

April 4, 1992

6. P200,000.00

Check No. 301250

April 25, 1992

(pp. 59-61, Rollo).

Subsequently, in a letter dated January 22, 1992, petitioner informed private respondent that his checking account with PCI Bank

has been closed and a new checking account with the same drawee bank is opened for practical purposes. The letter further statedthat the postdated checks issued will be replaced with new ones in the same drawee bank (p. 63, Rollo).

On January 25, 1992, petitioner through Ms. Socorro Diaz, wife of petitioner, paid private respondent Mario Espina P200,000.00,

acknowledged by him as partial payment for the condominium unit subject of this controversy (p. 64, Rollo).

On July 26, 1992, private respondent sent petitioner a "Notice of Cancellation" of the Provisional Deed of Sale (p. 48, Rollo).


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However, despite the Notice of Cancellation from private respondent, the latter accepted payment from petitioner per Metrobank

Check No. 395694 dated and encashed on October 28, 1992 in the amount of P100,000.00 (p. 64, Rollo).

On February 24, 1993, private respondent filed a complaint docketed as Civil Case No. 2104 for Unlawful Detainer against petitioner

before the Municipal Trial Court of Antipolo, Branch 1.

On November 12, 1993, the trial court rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered ordering the defendant and all persons claiming

rights under him to vacate unit 403 of the Victoria Golf Valley Condominium, Valley Golf Subdivision, Antipolo, Rizal; to pay the total

arrears of P126,000.00, covering the period July 1991 up to the filing (sic) complaint, and to pay P7,000.00 every month thereafter as

rentals unit (sic) he vacates the premises; to pay the amount of P5,000.00 as and attorney's fees; the amount of P300.00 per

appearance, and costs of suit.

However, the plaintiff may refund to the defendant the balance from (sic) P400,000.00 after deducting all the total obligations of the

defendant as specified in the decision from receipt of said decision.

SO ORDERED. (Decision, Annex "B"; p. 27, Rollo).

From the said decision, petitioner appealed to the Regional Trial Court Branch 71, Antipolo, Rizal. On April 29, 1994, said appellate

court affirmed in all respects the decision of the trial court. 4

On June 14, 1994, petitioner filed with the Court of Appeals a petition for review.

On July 20, 1994, the Court of Appeals promulgated its decision reversing the appealed decision and dismissing the complaint for

unlawful detainer with costs against petitioner Espina.

On August 8, 1994, petitioner filed a motion for reconsideration of the decision of the Court of Appeals. 5

On August 19, 1994, the Court of Appeals denied the motion. 6

Hence, this appeal via petition for review on certiorari. 7


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The basic issue raised is whether the Court of Appeals erred in ruling that the provisional deed of sale novated the existing contract

of lease and that petitioner had no cause of action for ejectment against respondent Diaz.

We resolve the issue in favor of petitioner.

According to respondent Diaz, the provisional deed of sale that was subsequently executed by the parties novated the originalexisting contract of lease. The contention cannot be sustained. Respondent originally occupied the condominium unit in question in

1987 as a lessee. 8 While he occupied the premises as lessee, petitioner agreed to sell the condominium unit to respondent by

installments. 9 The agreement to sell was provisional as the consideration was payable in installments.

The question is, did the provisional deed of sale novate the existing lease contract? The answer is no. The novation must be clearly

proved since its existence is not presumed. 10 "In this light, novation is never presumed; it must be proven as a fact either by

express stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new obligations

or contracts." 11 Novation takes place only if the parties expressly so provide, otherwise, the original contract remains in force. In

other words, the parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. 12

Where there is no clear agreement to create a new contract in place of the existing one, novation cannot be presumed to take place

unless the terms of the new contract are fully incompatible with the former agreement on every point. 13 Thus, a deed of cession of

the right to repurchase a piece of land does not supersede a contract of lease over the same property. 14 In the provisional deed of

sale in this case, after the initial down payment, respondent's checks in payment of six installments all bounced and were

dishonored upon presentment for the reason that the bank account was closed. 15 Consequently, on July 26, 1992, petitioner

terminated the provisional deed of sale by a notarial notice of cancellation. 16 Nonetheless, respondent Diaz continued to occupy

the premises, as lessee, but failed to pay the rentals due. On October 28, 1992, respondent made a payment of P100,000.00 that

may be applied either to the back rentals or for the purchase of the condominium unit. On February 13, 1993, petitioner gave

respondent a notice to vacate the premises and to pay his back rentals. 17 Failing to do so, respondent's possession became

unlawful and his eviction was proper. Hence, on February 24, 1993, petitioner filed with the Municipal Trial Court, Antipolo, Rizal,

Branch 01 an action for unlawful detainer against respondent Diaz. 18

Now respondent contends that the petitioner's subsequent acceptance of such payment effectively withdrew the cancellation of the

provisional sale. We do not agree. Unless the application of payment is expressly indicated, the payment shall be applied to the

obligation most onerous to the debtor. 19 In this case, the unpaid rentals constituted the more onerous obligation of the

respondent to petitioner. As the payment did not fully settle the unpaid rentals, petitioner's cause of action for ejectment survives.

Thus, the Court of Appeals erred in ruling that the payment was "additional payment" for the purchase of the property.

WHEREFORE, the Court GRANTS the petition for review on certiorari, and REVERSES the decision of the Court of Appeals. 20

Consequently, the Court REVIVES the decision of the Regional Trial Court, Antipolo, Rizal, Branch 71, 21 affirming in toto the decision

of the Municipal Trial Court, Antipolo, Rizal, Branch 01. 22

No costs.

SO ORDERED.


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TENDER OF PAYMENTAND CONSIGNATION

TEDDY G. PABUGAIS vs. DAVE P. SAHIJWANI

D E C I S I O N

YNARES-SANTIAGO, J.:

Assailed in this petition for review on certiorari is the January 16, 2003 Amended Decision[1] of the Court of Appeals[2] in CA-G.R. CV

No. 55740 which set aside the November 29, 1996 Decision[3] of the Regional Trial Court of Makati, Branch 64, in Civil Case No. 94-

2363.

Pursuant to an Agreement And Undertaking*4+ dated December 3, 1993, petitioner Teddy G. Pabugais, in consideration of the

amount of Fifteen Million Four Hundred Eighty Seven Thousand Five Hundred Pesos (P15,487,500.00), agreed to sell to respondent

Dave P. Sahijwani a lot containing 1,239 square meters located at Jacaranda Street, North Forbes Park, Makati, Metro Manila.

Respondent paid petitioner the amount of P600,000.00 as option/reservation fee and the balance of P14,887,500.00 to be paid

within 60 days from the execution of the contract, simultaneous with delivery of the owners duplicate Transfer Certificate of Title in

respondents name the Deed of Absolute Sale; the Certificate of Non-Tax Delinquency on real estate taxes and Clearance on

Payment of Association Dues. The parties further agreed that failure on the part of respondent to pay the balance of the purchase

price entitles petitioner to forfeit the P600,000.00 option/reservation fee; while non-delivery by the latter of the necessary

documents obliges him to return to respondent the said option/reservation fee with interest at 18% per annum, thus

5. DEFAULTIn case the FIRST PARTY [herein respondent] fails to pay the balance of the purchase price within the stipulated due

date, the sum of P600,000.00 shall be deemed forfeited, on the other hand, should the SECOND PARTY [herein petitioner] fail to

deliver within the stipulated period the documents hereby undertaken, the SECOND PARTY shall return the sum of P600,000.00 with

interest at 18% per annum.[5]

Petitioner failed to deliver the required documents. In compliance with their agreement, he returned to respondent the latters

P600,000.00 option/reservation fee by way of Far East Bank & Trust Company Check No. 25AO54252P, which was, however,

dishonored.

What transpired thereafter is disputed by both parties. Petitioner claimed that he twice tendered to respondent, through his

counsel, the amount of P672,900.00 (representing the P600,000.00 option/reservation fee plus 18% interest per annum computed

from December 3, 1993 to August 3, 1994) in the form of Far East Bank & Trust Company Managers Check No. 088498, dated

August 3, 1994, but said counsel refused to accept the same. His first attempt to tender payment was allegedly made on August 3,

1994 through his messenger;[6] while the second one was on August 8, 1994,[7] when he sent via DHL Worldwide Services, the

managers check attached to a letter dated August 5, 1994.*8+ On August 11, 1994, petitioner wrote a letter to respondent saying


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that he is consigning the amount tendered with the Regional Trial Court of Makati City.[9] On August 15, 1994, petitioner filed a

complaint for consignation.[10]

Respondents counsel, on the other hand, admitted that his office received petitioners letter dated August 5, 1994, but claimed that

no check was appended thereto.[11] He averred that there was no valid tender of payment because no check was tendered and the

computation of the amount to be tendered was insuffic ient,[12] because petitioner verbally promised to pay 3% monthly interest

and 25% attorneys fees as penalty for default, in addition to the interest of 18% per annum on the P600,000.00 option/reservation

fee.[13]

On November 29, 1996, the trial court rendered a decision declaring the consignation invalid for failure to prove that petitioner

tendered payment to respondent and that the latter refused to receive the same. It further held that even assuming that

respondent refused the tender, the same is justified because the managers check allegedly offered by petitioner was not legal

tender, hence, there was no valid tender of payment. The trial court ordered petitioner to pay respondent the amount of

P600,000.00 with interest of 18% per annum from December 3, 1993 until fully paid, plus moral damages and attorneys fees.*14+

Petitioner appealed the decision to the Court of Appeals. Meanwhile, his counsel, Atty. Wilhelmina V. Joven, died and she was

substituted by Atty. Salvador P. De Guzman, Jr.[15] On December 20, 2001, petitioner executed a Deed of Assignment*16+

assigning in favor of Atty. De Guzman, Jr., part of the P672,900.00 consigned with the trial court as partial payment of the latters

attorneys fees.*17+ Thereafter, on January 7, 2002, petitioner filed an Ex Parte Motion to Withdraw Consigned Money.[18] This was

followed by a Motion to Intervene filed by Atty. De Guzman, Jr., praying that the amount consigned be released to him by virtue of

the Deed of Assignment.[19]

Petitioners motion to withdraw the amount consigned was denied by the Court of Appeals and the decision of the trial court was

affirmed with modification as to the amount of moral damages and attorneys fees.*20+

On a motion for reconsideration, the Court of Appeals declared the consignation as valid in an Amended Decision dated January 16,

2003. It held that the validity of the consignation had the effect of extinguishing petitioners obligation to return the

option/reservation fee to respondent. Hence, petitioner can no longer withdraw the same. The decretal portion of the Amended

Decision states:

WHEREFORE, premises considered, our decision dated April 26, 2002 is RECONSIDERED. The trial courts decision is hereby

REVERSED and SET ASIDE, and a new one is entered (1) DECLARING as valid the consignation by the plaintiff-appellant in favor of

defendant-appellee of the amount of P672,900.00 with the Makati City RTC Clerk of Court and deposited under Official Receipt No.379061 dated 15 August 1994 and (2) DECLARING as extinguished appellants obligation in favor of appellee under paragraph 5 of

the parties AGREEMENT AND UNDERTAKING. Neither party shall recover costs from the other.

SO ORDERED.[21]


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Unfazed, petitioner filed the instant petition for review contending, inter alia, that he can withdraw the amount deposited with the

trial court as a matter of right because at the time he moved for the withdrawal thereof, the Court of Appeals has yet to rule on the

consignations validity and the respondent had not yet accepted the same.

The resolution of the case at bar hinges on the following issues: (1) Was there a valid consignation? and (2) Can petitioner withdraw

the amount consigned as a matter of right?

Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or

refuses to accept payment and it generally requires a prior tender of payment.[22] In order that consignation may be effective, the

debtor must show that: (1) there was a debt due; (2) the consignation of the obligation had been made because the creditor to

whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons

claimed to be entitled to receive the amount due or because the title to the obligation has been lost; (3) previous notice of the

consignation had been given to the person interested in the performance of the obligation; (4) the amount due was placed at the

disposal of the court; and (5) after the consignation had been made the person interested was notified thereof. Failure in any of

these requirements is enough ground to render a consignation ineffective.[23]

The issues to be resolved in the instant case concerns one of the important requisites of consignation, i .e, the existence of a valid

tender of payment. As testified by the counsel for respondent, the reasons why his client did not accept petitioners tenderof

payment were(1) the check mentioned in the August 5, 1994 letter of petitioner manifesting that he is settling the obligation was

not attached to the said letter; and (2) the amount tendered was insufficient to cover the obligation. It is obvious that the reason for

respondents non-acceptance of the tender of payment was the alleged insufficiency thereofand not because the said check was

not tendered to respondent, or because it was in the form of managers check. While it is true that in general, a managers check is

not legal tender, the creditor has the option of refusing or accepting it.[24] Payment in check by the debtor may be acceptable as

valid, if no prompt objection to said payment is made.*25+ Consequently, petitioners tender of payment in the form of managers

check is valid.

Anent the sufficiency of the amount tendered, it appears that only the interest of 18% per annum on the P600,000.00

option/reservation fee stated in the default clause of the Agreement And Undertaking was agreed upon by the parties, thus

5. DEFAULTIn case the FIRST PARTY [herein respondent] fails to pay the balance of the purchase price within the stipulated due

date, the sum of P600,000.00 shall be deemed forfeited, on the other hand, should the SECOND PARTY [herein petitioner] fail to

deliver within the stipulated period the documents hereby undertaken, the SECOND PARTY shall return the sum of P600,000.00 with

interest at 18% per annum.[26]

The managers check in the amount of P672,900.00 (representing the P600,000.00 option/reservation fee plus 18% interest per

annum computed from December 3, 1993 to August 3, 1994) which was tendered but refused by respondent, and thereafter

consigned with the court, was enough to satisfy the obligation.

There being a valid tender of payment in an amount sufficient to extinguish the obligation, the consignation is valid.


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As regards petitioners right to withdraw the amount consigned, reliance on Article 1260 of the Civil Code is misplaced. The said

Article provides

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial confirmation that the consignation has been properly made,the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force.

The amount consigned with the trial court can no longer be withdrawn by petitioner because respondents prayer in his answer that

the amount consigned be awarded to him is equivalent to an acceptance of the consignation, which has the effect of extinguishing

petitioners obligation.

Moreover, petitioner failed to manifest his intention to comply with the Agreement And Undertaking by delivering the necessary

documents and the lot subject of the sale to respondent in exchange for the amount deposited. Withdrawal of the moneyconsigned would enrich petitioner and unjustly prejudice respondent.

The withdrawal of the amount deposited in order to pay attorneys fees to petitioners counsel, Atty. De Guzman, Jr., violates Article

1491 of the Civil Code which forbids lawyers from acquiring by assignment, property and rights which are the object of any litigation

in which they may take part by virtue of their profession.[27] Furthermore, Rule 10 of the Canons of Professional Ethics provides

that thelawyer should not purchase any interest in the subject matter of the litigation which he is conducting. The assailed

transaction falls within the prohibition because the Deed assigning the amount of P672,900.00 to Atty. De Guzman, Jr., as part of his

attorneys fees was executed during the pendency of this case with the Court of Appeals. In his Motion to Intervene, Atty. De

Guzman, Jr., not only asserted ownership over said amount, but likewise prayed that the same be released to him. That petitioner

knowingly and voluntarily assigned the subject amount to his counsel did not remove their agreement within the ambit of the

prohibitory provisions.[28] To grant the withdrawal would be to sanction a void contract.[29]

WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The January 16, 2003 Amended Decision of the

Court of Appeals in CA-G.R. CV No. 55740, which declared the consignation by the petitioner in favor of respondent of the amount of

P672,900.00 with the Clerk of Court of the Regional Trial Court of Makati City valid, and which declared petitioners obligation to

respondent under paragraph 5 of the Agreement And Undertaking as having been extinguished, is AFFIRMED. No costs.

SO ORDERED.


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SPS. RICARDO AND LYDIA LLOBRERA, SPS. BENJAMIN AND ESTHER LLOBRERA, SPS. MIKE AND RESIDA MALA, SPS. OTOR AND

DOLINANG BAGONTE, SPS. EDUARDO AND DAMIANA ICO, SPS. ANTONIO AND MERLY SOLOMON, SPS. ANSELMO AND VICKY

SOLOMON, SPS. ALEX AND CARMELITA CALLEJO, SPS. DEMETRIO AND JOSEFINA FERRER, SPS. BENJAMIN AND ANITA MISLANG,

SPS. DOMINGO AND FELICIDAD SANCHEZ, SPS. FERNANDO AND CARMELITA QUEBRAL, SPS. BERNARDO AND PRISCILLA MOLINA,

PRISCILLA BAGA AND BELEN SEMBRANO,

V.

JOSEFINA V. FERNANDEZ,

G.R. No. 142882

Promulgated:

May 2, 2006

GARCIA, J.:

Under consideration is this petition for review on certiorari under Rule 45 of the Rules of Court to nullify and set aside the following

issuances of the Court of Appeals (CA) in CA-G.R. SP No. 48918, to wit:

1. Decision dated June 30, 1999,[1] affirming the Decision dated August 7, 1998 of the Regional Trial Court (RTC) of

Dagupan City, Branch 41, in Civil Case No. 98-02353-D which affirmed an earlier decision of the Municipal Trial Court in Cities

(MTCC), Dagupan City, Branch 2, in Civil Case No. 10848, entitled Josefina F. De Venecia Fernandez vs. Sps. Mariano and Lourdes

Melecio, et al., an action for ejectment.

2. Resolution dated March 27, 2000,*2+ denying petitioners motion for reconsideration.

Subject of the controversy is a 1,849 square-meter parcel of land, covered by Transfer Certificate of Title No. 9042. Respondent

Josefina V. Fernandez, as one of the registered co-owners of the land, served a written demand letter upon petitioners Spouses

Llobrera, et al., to vacate the premises within fifteen (15) days from notice. Receipt of the demand letter notwithstanding,

petitioners refused to vacate, necessitating the filing by the respondent of a formal complaint against them before the Barangay

Captain of Barangay 11, Dagupan City. Upon failure of the parties to reach any settlement, the Barangay Captain issued the

necessary certification to file action.

Respondent then filed a verified Complaint for ejectment and damages against the petitioners before the MTCC of Dagupan City,

which complaint was raffled to Branch 2 thereof.

By way of defense, petitioners alleged in their Answer that they had been occupying the property in question beginning the year

1945 onwards, when their predecessors-in-interest, with the permission of Gualberto de Venecia, one of the other co-owners of said

land, developed and occupied the same on condition that they will pay their monthly rental of P20.00 each. From then on, they have

continuously paid their monthly rentals to Gualberto de Venecia or Rosita de Venecia or their representatives, such payments being

duly acknowledged by receipts. Beginning sometime June 1996, however, the representative of Gualberto de Venecia refused to

accept their rentals, prompting them to consign the same to Banco San Juan, which bank deposit they continued to maintain and

update with their monthly rental payments.

In a decision dated February 18, 1998, the MTCC rendered judgment for the respondent as plaintiff, thus:


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WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendants as follows:

1. Ordering each of the defendants to vacate the portion of the land in question they respectively occupy and to restore

the possession thereof to the plaintiff and her co-owners;

2. Ordering each of the defendants to pay to the plaintiff the amount of P300.00 per month from January 17, 1997 untilthey vacate the land in question as the reasonable compensation for the use and occupation of the premises;

3. Ordering the defendants to pay proportionately the amount of P10,000.00 as attorneys fee and P2,000.00 as litigation

expenses, and to pay the cost of suit.

SO ORDERED.

On petitioners appeal to the RTC of Dagupan City, Branch 41 thereof, in its decision of August 7, 1998, affirmed the foregoing

judgment.

Therefrom, petitioners went to the CA whereat their recourse was docketed as CA -G.R. SP. No. 48918. As stated at the threshold

hereof, the CA, in its Decision of June 30, 1999, affirmed that of the RTC. With the CAs denial of their motion for reconsideration, in

its Resolution of March 27, 2000, petitioners are now before this Court with the following assignment of errors:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN:

A. HOLDING THAT THE OCCUPATION AND POSSESSION oF THE PROPERTY in question is by mere tolerance of the respondent.

B. holding that the failure of the petitioners (defendants) to vacate the premises after demands were made upon them is a valid

ground for their ejectment.

C. holding that the consignation made by petitioners in contemplation of article 1256 of the new civil code is not legally tenable.

D. affirming the decision of the regional trial court dated August 7, 1998 which, likewise affirmed the decision of the mtcc decision

dated February 18, 1998 insofar as the order for the petitioners (defendants) to pay rental and attorneys fees and litigation

expenses.

At the heart of the controversy is the issue of whether petitioners possession of the subject property is founded on contract or not.

This factual issue was resolved by the three (3) courts below in favor of respondent. As tersely put by the CA in its assailed decision

of June 30, 1999:

Petitioners failed to present any written memorandum of the alleged lease arrangements between them and Gualberto De Venecia.

The receipts claimed to have been issued by the owner were not presented on the excuse that the March 19, 1996 fire burned the

same. Simply put, there is a dearth of evidence to substantiate the averred lessor-lessee relationship. x x x.[3]

Consistent with this Courts long-standing policy, when the three courts below have consistently and unanimously ruled on a factual

issue, such ruling is deemed final and conclusive upon this Court, especially in the absence of any cogent reason to depart

therefrom.

From the absence of proof of any contractual basis for petitioners possession of the subject premises, the only legal implication is

that their possession thereof is by mere tolerance. In Roxas vs. Court of Appeals,[4] we ruled:


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A person who occupies the land of another at the latters tolerance or permission, without any contract between them, is

necessarily bound by an implied promise that he will vacate upon demand, failing which, a summary action for ejectment is the

proper remedy against him.

The judgment favoring the ejectment of petitioners being consistent with law and jurisprudence can only be affirmed. The alleged

consignation of the P20.00 monthly rental to a bank account in respondents name cannot save the day for the petitioners simply

because of the absence of any contractual basis for their claim to rightful possession of the subject property. Consignation based on

Article 1256 of the Civil Code indispensably requires a creditor-debtor relationship between the parties, in the absence of which, the

legal effects thereof cannot be availed of.

Article 1256 pertinently provides:

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be

released from responsibility by the consignation of the thing or sum due.

Unless there is an unjust refusal by a creditor to accept payment from a debtor, Article 1256 cannot apply. In the present case, the

possession of the property by the petitioners being by mere tolerance as they failed to establish through competent evidence the

existence of any contractual

oblicon 2nd exam full txt part 2

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