[G.R. No. 118342. January 5, 1998]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LYDIA CUBA, respondents.

[G.R. No. 118367. January 5, 1998]

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA P. CAPERAL, respondents.

D E C I S I O N

DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint[1] filed against the Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the

Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over a 44-hectare fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of DBPs sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the fishpond; and (5) the recovery of damages, attorneys fees, and expenses of litigation.

After the joinder of issues following the filing by the parties of their respective pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pre-trial order:[2]

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13, 1974 from the Government;

2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the Promissory Notes dated September 6, 1974; August 11, 1975; and April 4, 1977;

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights;

4. Plaintiff failed to pay her loan on the sc heduled dates thereof in accordance with the terms of the Promissory Notes;

5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;

6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question, defendant DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond in question;

7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBP thereafter accepted the offer to repurchase in a letter addressed to plaintiff dated February 1, 1982;

8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband;

9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she entered with the DBP a temporary arrangement whereby in consideration for the deferment of the Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain payments as stated in temporary Arrangement dated February 23, 1982;

11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984, and which was received by plaintiff Lydia Cuba;

12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the fishpond in question;

13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to dispose of the property;

14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina Caperal on August 16, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.

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

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBAs leasehold rights over the fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised its contractual right under the Assignments of Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP.

The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession and ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which provides as follows:

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

It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of mortgage because (1) they were given as security for loans, (2) although the fishpond land in question is still a public land, CUBAs leasehold rights and interest thereon are alienable rights which can be the proper subject of a mortgage; and (3) the intention of the contracting parties to treat the Assignment of Leasehold Rights as a mortgage was obvious and unmistakable; hence, upon

CUBAs default, DBPs only right was to foreclose the Assignment in accordance with law.

The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a clear case of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the Civil Code. It then concluded that since DBP never acquired lawful ownership of CUBAs leasehold rights, all acts of ownership and possession by the said bank were void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective.

As to damages, the trial court found ample evidence on record that in 1984 the representatives of DBP ejected CUBA and her caretakers not only from the fishpond area but also from the adjoining big house; and that when CUBAs son and caretaker went there on 15 September 1985, they found the said house unoccupied and destroyed and CUBAs personal belongings, machineries, equipment, tools, and other articles used in fishpond operation which were kept in the house were missing. The missing items were valued at about P550,000. It further found that when CUBA and her men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of which died because the DBP representatives prevented CUBAs men from feeding the fish. At the conservative price of P3.00 per fish, the gross

value would have been P690,000, and after deducting 25% of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual damages sustained by CUBA at P1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBAs leasehold rights. Such representation induced the said Bureau to terminate CUBAs leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA suffered moral shock, degradation, social humiliation, and serious anxieties for which she became sick and had to be hospitalized the trial court found her entitled to moral and exemplary damages. The trial court also held that CUBA was entitled to P100,000 attorneys fees in view of the considerable expenses she incurred for lawyers fees and in view of the finding that she was entitled to exemplary damages.

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

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant

Development Bank of the Philippines in appropriating for its own interest, without any judicial or extra-judicial foreclosure, plaintiffs leasehold rights and interest over the fishpond land in question under her Fishpond Lease Agreement No. 2083 (new);

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the Development Bank of the Philippines relative to said sale (Exhs. 16 and 26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by defendant Agripina Caperal in favor of the defendant

Development Bank of the Philippines (Exh. 24) as void ab initio;

4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal, jointly and severally, to restore to plaintiff the latters leasehold rights and interests and right of possession over the fishpond land in question, without prejudice to the right of defendant Development Bank of the Philippines to foreclose the securities given by plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following amounts:

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS (P1,067,500.00), as and for actual damages;

b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;

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

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorneys fees;

6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to defendant Development Bank of the Philippines under their Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought an increase in the amount of damages, while the latter questioned the findings of fact and law of the lower court.

In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the deed of assignment was null and void and that defendant Caperal could not validly acquire the leasehold rights

from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA - cession presupposes plurality of debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBA in assigning her property rights in payment of her debts, which amounted to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It, however, deleted the amount of exemplary damages and reduced the award of moral damages from P100,000 to P50,000 and attorneys fees, from P100,000 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cubas leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered DBP to turn over

possession of the property to Caperal as lawful holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as attorneys fees.

Since their motions for reconsideration were denied,[6] DBP and CUBA filed separate petitions for review.

In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorneys fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred (1) in not holding that the questioned deed of assignment was a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the deed of assignment effected a novation of the promissory notes; (c) in holding that CUBA was estopped from questioning the validity of the deed of assignment when she agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in reducing the amounts of moral damages and attorneys fees, in deleting the award of exemplary damages, and in not increasing the amount of damages.

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

It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which was covered by a promissory note. In all of these notes, there was a provision that: In the event of foreclosure of the mortgage securing this notes, I/We further bind

myself/ourselves, jointly and severally, to pay the deficiency, if any. [7]

Simultaneous with the execution of the notes was the execution of Assignments of Leasehold Rights [8] where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as borrower; the assigned rights, as mortgaged properties; and the instrument itself, as mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that failure to comply with the terms and condition of any of the loans shall cause all other loans to become due and demandable and all mortgages shall be foreclosed. And, condition no. 33 provided that if foreclosure is actually accomplished, the usual 10% attorneys fees and 10% liquidated damages of the total obligation shall be imposed. There is, therefore, no shred of doubt that a mortgage was intended.

Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for the payment of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights.

In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBPs contention that the assignment novated the promissory notes in that the obligation to pay a sum of money the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said assignment merely complemented or supplemented the notes; both could stand together. The former was only an accessory to the latter. Contrary to DBPs submission, the obligation to pay a sum of money remained, and the assignment merely served as security for the loans covered by the promissory notes. Significantly, both the deeds of assignment and the promissory notes were executed on the same dates the loans were granted. Also, the last paragraph of the assignment stated: The assignor further reiterates and states all terms, covenants, and conditions stipulated in the promissory note or notes covering the proceeds of this loan, making said promissory note or notes, to all intent and purposes, an integral part hereof.

Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more creditors and involves the assignment of all the debtors property.

Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads: Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales. It bears stressing that the assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness.[10]

We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the Assignee his Attorney-in-fact with full power and authority to take actual possession of the property above-described, together with all improvements thereon, subject to the approval of the Secretary of Agriculture and Natural Resources, to lease the same or any portion thereof and collect rentals, to make repairs or improvements thereon and pay the same, to sell or otherwise dispose of whatever rights the Assignor has or might have over said property and/or its improvements and perform any other act which the Assignee may deem convenient to protect its interest. All expenses advanced by the Assignee in connection with purpose above indicated which shall bear the same rate of interest aforementioned

are also guaranteed by this Assignment. Any amount received from rents, administration, sale or disposal of said property may be supplied by the Assignee to the payment of repairs, improvements, taxes, assessments and other incidental expenses and obligations and the balance, if any, to the payment of interest and then on the capital of the indebtedness secured hereby. If after disposal or sale of said property and upon application of total amounts received there shall remain a deficiency, said Assignor hereby binds himself to pay the same to the Assignee upon demand, together with all interest thereon until fully paid. The power herein granted shall not be revoked as long as the Assignor is indebted to the Assignee and all acts that may be executed by the Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.[11]

Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon CUBAs failure to pay the loan on time. It

merely provided for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it during the pre-trial, it had [w]ithout foreclosure proceedings, whether judicial or extrajudicial, appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question. Its contention that it limited itself to mere administration by posting caretakers is further belied by the deed of conditional sale it executed in favor of CUBA. The deed stated:

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

The title to the real estate property [sic] and all improvements thereon shall remain in the name of the Vendor until after the purchase price, advances

and interest shall have been fully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBAs leasehold rights merely on the strength of the deed of assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBAs default would operate to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the assignee.[12]

At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing of, the thing given as security for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from questioning DBPs act of appropriation.Estoppel is unavailing in this case. As held by this Court in some cases,[13] estoppel cannot give validity to an act that is prohibited by law or against public policy. Hence, the appropriation of the leasehold rights, being contrary to

Article 2088 of the Civil Code and to public policy, cannot be deemed validated by estoppel.

Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] to pay their loan amortizations.[14] This only goes to show that DBP was aware of the necessity of foreclosure proceedings.

In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled CUBAs original lease permit, approved the deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the subsequent acts emanating from DBPs appropriation of the leasehold rights, should therefore be set aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code.

Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction sale for failure to comply with the requirements

laid down by law, such as Act No. 3135, as amended.[15] With more reason that the sale of property given as security for the payment of a debt be set aside if there was no prior foreclosure proceeding.

Hence, DBP should render an accounting of the income derived from the operation of the fishpond in question and apply the said income in accordance with condition no. 12 of the deed of assignment which provided: Any amount received from rents, administration, may be applied to the payment of repairs, improvements, taxes, assessment, and other incidental expenses and obligations and the balance, if any, to the payment of interest and then on the capital of the indebtedness.

We shall now take up the issue of damages.

Article 2199 provides:

Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved.Such compensation is referred to as actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty.[16] A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the

best obtainable evidence of the actual amount thereof.[17] It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne.[18]

In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000 which represented the value of the alleged lost articles of CUBA and P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the adjoining house. This award was affirmed by the Court of Appeals.

We find that the alleged loss of personal belongings and equipment was not proved by clear evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of those items before DBP took over the fishpond in question. As pointed out by DBP, there was not inventory of the alleged lost items before the loss which is normal in a project which sometimes, if not most often, is left to the care of other persons. Neither was a single receipt or record of acquisition presented.

Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the damages resulting from DBPs take-over of the fishpond.Yet, it was only in September 1985 when her son and a caretaker went to the fishpond and the adjoining house that she came to know of the alleged loss of several articles. Such claim for losses of property,

having been made before knowledge of the alleged actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for actual damages.

With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which died when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss was not duly proved; besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October 1979,[19] she declared:

1. That from February to May 1978, I was then seriously ill in Manila and within the same period I neglected the management and supervision of the cultivation and harvest of the produce of the aforesaid fishpond thereby resulting to the irreparable loss in the produce of the same in the amount of about P500,000.00 to my great damage and prejudice due to fraudulent acts of some of my fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond, did CUBA intimate that upon DBPs take-over there was a total of 230,000 pieces of bangus, but all of which died

because of DBPs representatives prevented her men from feeding the fish.

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

In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary to law and public policy, as well as its false representation to the then Ministry of Agriculture and Natural Resources that it had foreclosed the mortgage, an award of moral damages in the amount of P50,000 is in order conformably with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective damages in the amount of P25,000 should likewise be awarded by way of example or correction for the public good. [20] There being an award of exemplary damages, attorneys fees are also recoverable.[21]

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum commissorium and the award of actual damages; and by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the attorneys fees, fromP100,000 to P20,000. The Development Bank of the Philippines is hereby ordered to

render an accounting of the income derived from the operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the determination of each partys financial obligation to one another.

SO ORDERED.

[G. R. No. 126800. November 29, 1999]

NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES RODITO F. ROSEL and NORMA A. ROSEL, respondents.

R E S O L U T I O N

PARDO, J. :

The case before the Court is a petition for review on certiorari[1] to annul the decision of the Court of Appeals,[2] reversing and setting aside the decision of the Regional Trial Court,[3], dated November 10, 1992, Judge Teodoro

P. Regino. 3 Quezon City, Branch 84, in an action for specific performance with consignation.

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante and her late husband Ismael C. Bustamante, under the following terms and conditions:

1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER CERTIFICATE OF TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or less, situated along Congressional Avenue.

2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN (18%) PERCENT per annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of the aforestated parcel of land, however, in the event the borrowers fail to pay, the lender has the option to buy or purchase the collateral for a total consideration of TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest therein;

3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while the borrowers do hereby confess receipt of the borrowed amount.[4]

When the loan was about to mature on March 1, 1989, respondents proposed to buy at the pre-set price of P200,000.00, the seventy (70) square meters parcel of land covered by TCT No. 80667, given as collateral to guarantee payment of the loan. Petitioner, however, refused to sell and requested for extension of time to pay the loan and offered to sell to respondents another residential lot located at Road 20, Project 8, Quezon City, with the principal loan plus interest to be used as down payment. Respondents refused to extend the payment of the loan and to accept the lot in Road 20 as it was occupied by squatters and petitioner and her husband were not the owners thereof but were mere land developers entitled to subdivision shares or commission if and when they developed at least one half of the subdivision area.[5]

Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter refused to accept, insisting on petitioners signing a prepared deed of absolute sale of the collateral.

On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a

complaint for specific performance with consignation against petitioner and her spouse.[6]

Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell the collateral pursuant to the option to buy embodied in the loan agreement.

On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a petition for consignation, and deposited the amount of P153,000.00 with the City Treasurer of Quezon City on August 10, 1990.[7]

When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the amount of P47,500.00 with the trial court.[8] In arriving at the amount deposited, respondents considered the principal loan of P100,000.00 and 18% interest per annum thereon, which amounted to P52,500.00.[9] The principal loan and the interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00.[10]

After due trial, on November 10, 1992, the trial court rendered decision holding:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Denying the plaintiffs prayer for the defendants execution of the Deed of Sale to Convey the collateral in plaintiffs favor;

2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at 18% per annum commencing on March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount with the Office of the City Treasurer under Official Receipt No. 0116548 (Exhibit 2); and

3. To pay Attorneys Fees in the amount of P 5,000.00, plus costs of suit.

SO ORDERED.

Quezon City, Philippines, November 10, 1992.

TEODORO P. REGINO

Judge[11]

On November 16, 1992, respondents appealed from the decision to the Court of Appeals.[12] On July 8, 1996, the Court of Appeals rendered decision reversing the ruling of the Regional Trial Court. The dispositive portion of the Court of Appeals decision reads:

IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET ASIDE and a new one entered in favor of the plaintiffs ordering the defendants to accept the amount of P 47,000.00 deposited with the Clerk of Court of Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for defendants to execute the necessary Deed of Sale in favor of the plaintiffs over the 70 SQUARE METER portion and the apartment standing thereon being occupied by the plaintiffs and covered by TCT No. 80667 within fifteen (15) days from finality hereof. Defendants, in turn, are allowed to withdraw the amount of P153,000.00 deposited by them under Official Receipt No. 0116548 of the City Treasurers Office of Quezon City. All other claims and counterclaims are DISMISSED, for lack of sufficient basis. No costs.

SO ORDERED.[13]

Hence, this petition.[14]

On January 20, 1997, we required respondents to comment on the petition within ten (10) days from notice.[15] On February 27, 1997, respondents filed their comment.[16]

On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible error

on the part of respondent court in ordering the execution of the necessary deed of sale in conformity the with the parties stipulated agreement. The contract is the law between the parties thereof (Syjuco v. Court of Appeals, 172 SCRA 111, 118, citing Phil. American General Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146 SCRA 360).[17]

On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the denial alleging that the real intention of the parties to the loan was to put up the collateral as guarantee similar to an equitable mortgage according to Article 1602 of the Civil Code.[18]

On April 21, 1998, respondents filed an opposition to petitioners motion for reconsideration. They contend that the agreement between the parties was not a sale with right of re-purchase, but a loan with interest at 18% per annum for a period of two years and if petitioner fails to pay, the respondent was given the right to purchase the property or apartment for P200,000.00, which is not contrary to law, morals, good customs, public order or public policy. [19]

Upon due consideration of petitioners motion, we now resolve to grant the motion for reconsideration.

The questions presented are whether petitioner failed to pay the loan at its maturity date and whether

the stipulation in the loan contract was valid and enforceable.

We rule that petitioner did not fail to pay the loan.

The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to settle the loan which respondents refused to accept, insisting that petitioner sell to them the collateral of the loan.

When respondents refused to accept payment, petitioner consigned the amount with the trial court.

We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. The sale of the collateral is an obligation with a suspensive condition.[20] It is dependent upon the happening of an event, without which the obligation to sell does not arise. Since the event did not occur, respondents do not have the right to demand fulfillment of petitioners obligation, especially where the same would not only be disadvantageous to petitioner but would also unjustly enrich respondents considering the inadequate consideration (P200,000.00) for a 70 square meter property situated at Congressional Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties and must be complied with in good faith.[21] There are, however,

certain exceptions to the rule, specifically Article 1306 of the Civil Code, which provides:

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as security for the loan. This is embraced in the concept ofpactum commissorium, which is proscribed by law.[22]

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.[23]

In Nakpil vs. Intermediate Appellate Court,[24] we said:

The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him (respondent) xxx in case petitioner fails to reimburse Valdes, must then be construed as tantamount

to pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondents manifestation, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as security for the loan; and there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner.

A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the words used by the parties to project that intention. In this case, the intent to appropriate the property given as collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in the event of non payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.[25]

All persons in need of money are liable to enter into contractual relationships whatever the condition if only to alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise

caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey.

WHEREFORE, we GRANT petitioners motion for reconsideration and SET ASIDE the Courts resolution of February 9, 1998. We REVERSE the decision of the Court of Appeals in CA-G. R. CV No. 40193. In lieu thereof, we hereby DISMISS the complaint in Civil Case No. Q-90-4813.

No costs.

SO ORDERED.

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG,Petitioners,

- versus -

ROBAN LENDING CORPORATION,Respondent.

G.R. No. 172592

Present:

QUISUMBING, J., Chairperson,CARPIO MORALES,TINGA,BRION, andAUSTRIA-MARTINEZ,* JJ.

Promulgated:July 9, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

 

 

D E C I S I O N 

 

CARPIO MORALES, J.:On different dates from July 14, 1999 to March

20, 2000, petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation (respondent) in the total amount of P4,000,000.00. These loans were secured by a real estate mortgage on petitioners parcels of land located in Binauganan, Tarlac City and covered by TCT No. 297840.[1]

 On February 12, 2001, petitioners and

respondent executed an Amendment to Amended Real Estate Mortgage[2] consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment Agreement[3] wherein petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of their total obligation, and a Memorandum of Agreement[4]reading:

 That the FIRST PARTY [Roban

Lending Corporation] and the SECOND PARTY [the petitioners] agreed to consolidate and restructure all aforementioned loans, which have been all past due and delinquent since April 19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND PARTY hereby sign [sic] another promissory note in the amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral part of this document), with a promise to pay the FIRST PARTY in full within one year from the date of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their DACION IN PAYMENT agreement, which they have executed and signed today in favor of the FIRST PARTY be enforced[.][5]

   

In April 2002 (the day is illegible), petitioners filed a Complaint,[6] docketed as Civil Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for being pactum commissorium.[7]

 Petitioners alleged that the loans extended to

them from July 14, 1999 to March 20, 2000 were founded on several uniform promissory notes, which provided for 3.5% monthly interest rates, 5% penalty per month on the total amount due and demandable, and a further sum of 25% attorneys fees thereon,[8] and in addition, respondent exacted certain sums denominated as EVAT/AR.[9] Petitioners decried these additional charges as illegal, iniquitous, unconscionable, and revolting to the conscience as they hardly allow any borrower any chance of survival in case of default.[10]

 

Petitioners further alleged that they had previously made payments on their loan accounts, but because of the illegal exactions thereon, the total balance appears not to have moved at all, hence, accounting was in order.[11]

 Petitioners thus prayed for judgment: 

a)                Declaring the Real Estate Mortgage Contract and its amendments x x x as null and void and without legal force and effect for having been renounced, abandoned, and given up;

 b)               Declaring the

Memorandum of Agreement xxx and Dacion in Payment x x x as null and void for being pactum commissorium;

 c)                Declaring the interests,

penalties, Evat [sic] and attorneys fees assessed and loaded into the loan accounts of the plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal and therefore, stricken out or set aside;

 d)               Ordering an accounting

on plaintiffs loan accounts to determine the true and correct balances on their obligation against legal charges only; and

 e)                Ordering defendant to

[pay] to the plaintiffs: -- e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages of P50,000.00; e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance fee per hearing; and e.3 The cost of suit.[12]

     

as well as other just and equitable reliefs.In its Answer with Counterclaim,[13] respondent maintained the legality of its transactions with petitioners, alleging that:

 x x x x If the voluntary execution of the

Memorandum of Agreement and Dacion in Payment Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on;

  The Dacion in Payment

Agreement is lawful and valid as it is recognized x x x under Art. 1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction of their monetary obligation;

 The accumulated interest and

other charges which were computed for

more than two (2) years would stand reasonable and valid taking into consideration [that] the principal loan is P4,000,000 and if indeed it became beyond the Plaintiffs capacity to pay then the fault is attributed to them and not the Defendant[.][14]

 After pre-trial, the initial hearing of the case,

originally set on December 11, 2002, was reset several times due to, among other things, the parties efforts to settle the case amicably.[15]

 During the scheduled initial hearing of May 7,

2003, the RTC issued the following order:

 Considering that the plaintiff

Wilfredo Ong is not around on the ground that he is in Manila and he is attending to a very sick relative, without objection on the part of the defendants counsel, the initial hearing of this case is reset to June 18, 2003 at 10:00 oclock in the morning.

 

Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in the person of Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will submit the case for summary judgment.[16] (Underscoring supplied)

 It appears that the June 18, 2003 setting was

eventually rescheduled to February 11, 2004 at which both counsels were present[17] and the RTC issued the following order:

 The counsel[s] agreed to reset

this case on April 14, 2004, at 10:00 oclock in the morning. However, the counsels are directed to be ready with their memorand[a] together with all the exhibits or evidence needed to support their respective positions which should be the basis for the judgment on the pleadings   if the parties fail to settle the case in the next scheduled setting.

 x x x x[18] (Underscoring

supplied) 

 At the scheduled April 14, 2004 hearing, both

counsels appeared but only the counsel of respondent filed a memorandum.[19]

 By Decision of April 21, 2004, Branch 64 of

the Tarlac City RTC, finding on the basis of the pleadings that there was no pactum commissorium, dismissed the complaint.[20]

 On appeal,[21] the Court of Appeals[22] noted that 

x x x [W]hile the trial court in its decision stated that it was rendering judgment on the pleadings, x x x what it actually rendered was a summary judgment. A judgment on the pleadings is proper when the answer fails to tender an issue, or otherwise admits the material allegations of the adverse partys pleading. However, a judgment on the pleadings would not have been proper in this case as the answer tendered an issue, i.e. the validity of the MOA and DPA. On the other hand, a summary judgment may be rendered by

the court if the pleadings, supporting affidavits, and other documents show that, except as to the amount of damages, there is no genuine issue as to any material fact.[23]

  

Nevertheless, finding the error in nomenclature to be mere semantics with no bearing on the merits of the case,[24] the Court of Appeals upheld the RTC decision that there was no pactum commissorium.[25]

 Their Motion for Reconsideration[26] having

been denied,[27] petitioners filed the instant Petition for Review on Certiorari,[28] faulting the Court of Appeals for having committed a clear and reversible error

 I.                    . . . WHEN IT FAILED AND

REFUSED TO APPLY PROCEDURAL REQUISITES WHICH WOULD WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS RIGHT TO DUE PROCESS;

 

II.                 . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;

 III.               . . . WHEN IT FAILED AND

REFUSED TO HOLD THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE LAW AGAINST PACTUM COMMISSORIUM; and

 IV.            . . . WHEN IT FAILED TO

CONSIDER THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID FOR BEING CONTRARY TO LAW AND PUBLIC POLICY.[29]

  

The petition is meritorious.

 Both parties admit the execution and contents

of the Memorandum of Agreement and Dacion in Payment. They differ, however, on whether both contracts constitute pactum commissorium or dacion en pago.

 This Court finds that the Memorandum of

Agreement and Dacion in Payment constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides:

 The creditor cannot appropriate the

things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

 The elements of pactum commissorium, which

enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings,[30] are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by

the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.[31]

 In the case at bar, the Memorandum of

Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon petitioners failure to pay their debt within the stipulated period.

 Respondent argues that the law

recognizes dacion en pago as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.[32] This does not persuade. In a true dacion en pago, the assignment of the property extinguishes the monetary debt.[33] In the case at bar, the alienation of the properties was by way of security, and not by way

of satisfying the debt.[34] The Dacion in Payment did not extinguish petitioners obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which they were to pay within one year.[35]

 Respondent cites Solid Homes, Inc. v. Court of

Appeals[36] where this Court upheld a Memorandum of Agreement/Dacion en Pago.[37] That case did not involve the issue of pactum commissorium.[38]

 That the questioned contracts were freely and

voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being prohibited by law.[39]

 Respecting the charges on the loans, courts may

reduce interest rates, penalty charges, and attorneys fees if they are iniquitous or unconscionable.[40]

 This Court, based on existing jurisprudence,

[41] finds the monthly interest rate of 3.5%, or 42% per

annum unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable principal plus interest, with interest not paid when due added to and becoming part of the principal and likewise bearing interest at the same rate, compounded monthly[42] unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of demand.[43] This Court finds the attorneys fees of 25% of the principal, interests and interests thereon, and the penalty fees unconscionable, and thus reduces the attorneys fees to 25% of the principal amount only.[44]

 The prayer for accounting in petitioners

complaint requires presentation of evidence, they claiming to have made partial payments on their loans, vis a vis respondents denial thereof.[45] A remand of the case is thus in order.

 Prescinding from the above disquisition, the

trial court and the Court of Appeals erred in holding that a summary judgment is proper. A summary

judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law.[46] A summary judgment is proper if, while the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving party show that such issues are not genuine.[47] A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the presentation of evidence.[48] As mentioned above, petitioners prayer for accounting requires the presentation of evidence on the issue of partial payment.

 But neither is a judgment on the pleadings

proper. A judgment on the pleadings may be rendered only when an answer fails to tender an issue or otherwise admits the material allegations of the adverse partys pleadings.[49] In the case at bar, respondents Answer with Counterclaim disputed petitioners claims that the Memorandum of Agreement and Dation in Payment are illegal and that the extra charges on the loans are unconscionable.[50] Respondent disputed too petitioners allegation of bad faith.[51]

 WHEREFORE, the challenged Court of

Appeals Decision is REVERSED and SET ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by petitioner- spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending Corporation onFebruary 12, 2001 are declared NULL AND VOID for being pactum commissorium.

  In line with the foregoing findings, the

following terms of the loan contracts between the parties are MODIFIED as follows:

 1.                 The monthly interest rate of 3.5%, or

42% per annum, is reduced to 12% per annum;

 2.                 The monthly penalty fee of 5% of the

total amount due and demandable is reduced to 12% per annum, to be computed from the time of demand; and

 

3.                 The attorneys fees are reduced to 25% of the principal amount only.

 Civil Case No. 9322 is REMANDED to the

court of origin only for the purpose of receiving evidence on petitioners prayer for accounting.

 SO ORDERED.

G.R. No. L-49120 June 30, 1988

ESTATE OF GEORGE LITTON, petitioner, vs.CIRIACO B. MENDOZA and COURT OF APPEALS, respondents.

Ruben G. Bala for respondent Mendoza.

 

GANCAYCO, J.:

This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case, who had previously assigned in favor of his creditor his litigated credit in said case, by a deed of assignment which was duly submitted to the court, validly enter into a compromise agreement thereafter releasing the defendant therein from his claim without notice to his assignee? and (2) Will such previous knowledge on the part of the defendant of the assignment made by the plaintiff estop said defendant from

invoking said compromise as a ground for dismissal of the action against him?

The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco B. Mendoza," an action for the collection of a sum of money representing the value of two (2) checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza, private respondent herein, by way of guaranty with a commission.

The record discloses that the Bernal spouses 2 are engaged in the manufacture of embroidery, garments and cotton materials. Sometime in September 1963, C.B.M. Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the Bernals purchased on credit from Tan some cotton materials worth P 80,796.62, payment of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton materials to the Bernals. In view of the said arrangement, on November 1963, C.B.M. Products, through Mendoza, asked and received from the Bernals PBTC Check No. 626405 for P 80,796.62 dated February 20, 1964 with the understanding that the said check will remain in the possession of Mendoza until the cotton materials are finally manufactured into garments after which time Mendoza will sell the finished products for the Bernals. Meanwhile, the said check matured without having been cashed and Mendoza demanded the issuance of another check 4 in the same amount without a date.

On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5 in favor of Tan in the total amount of P 80,796.62. He informed the Bernals of the same and told them that they are indebted to him and asked the latter to sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan had the two checks issued by Mendoza discounted in a bank. However, the said checks were later returned to Tan with the words stamped "stop payment" which appears to have been ordered by

Mendoza for failure of the Bernals to deposit sufficient funds for the check that the Bernals issued in favor of Mendoza.

Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil Case No. Q-8303 6 while the Bernals brought an action for interpleader docketed as Civil Case No. 56850 7 for not knowing whom to pay. While both actions were pending resolution by the trial court, on March 20, 1966, Tan assigned in favor of George Litton, Sr. his litigatious credit * in Civil Case

No. 56850 against Mendoza, duly submitted to the court, with notice to the parties. 8 The deed of assignment was framed in the following tenor:

DEED OF ASSIGNMENT

I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6 Kanlaon, Quezon City, doing business under the name and style ALTA COMMERCIAL by way of securing or guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by these presents CEDE, ASSIGN, TRANSFER AND CONVEY unto the said Mr. GEORGE LITTON, SR., my claim against C.B.M. Products, Inc., personally guaranteed by Mr. Ciriaco B. Mendoza, in the amount of Eighty-Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P 80,796.62) the balance of which, in principal, and excluding, interests, costs, damages and attorney's fees now stands at P 76,000.00, P 4,796.62, having already been received by the assignor on December 23, 1965, pursuant to the order of the court in Civil CaseNo. 56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the amount of P 4,796.62 then on deposit with the court. All rights, and interests in said net amount, plus interests and costs, and

less attorney's fees, in case the amount allowed therefor be less than the amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila) and Q-8503 (C.F.I., Quezon City) are by these presents covered by this assignment.

I further undertake to hold in trust any and all amounts which may hereafter be realized from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn over to him such amounts in application to my liability to him, as his interest may then show, and I further undertake to cooperate towards the successful prosecution of the aforementioned cases making available myself, as witness or otherwise, as well as any and all documents thereto appertaining. ... 9

After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of Tan for a commission in the sum of P 4,847.79 and held Mendoza liable as a drawer whose liability is primary and not merely as an indorser and thus directed Mendoza to pay Tan the sum of P 76,000.00, the sum still due, plus damages and attorney's fees. 10

Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No. 41900-R, arguing in the main that his liability is one of an accommodation party and not as a drawer.

On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the decision of the lower court. 11

Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza entered into a compromise agreement with

Tan wherein the latter acknowledged that all his claims against Mendoza had been settled and that by reason of said settlement both parties mutually waive, release and quit whatever claim, right or cause of action one may have against the other, with a provision that the said compromise agreement shall not in any way affect the right of Tan to enforce by appropriate action his claims against the Bernal spouses. 12

On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision of January 27, 1977 be set aside, principally anchored upon the ground that a compromise agreement was entered into between him and Tan which in effect released Mendoza from liability. Tan filed an opposition to this motion claiming that the compromise agreement is null and void as he was not properly represented by his counsel of record Atty. Quiogue, and was instead represented by a certain Atty. Laberinto, and principally because of the deed of assignment that he executed in favor of George Litton, Sr. alleging that with such, he has no more right to alienate said credit.

While the case was still pending reconsideration by the respondent court, Tan, the assignor, died leaving no properties whatever to satisfy the claim of the estate of the late George Litton, Sr.

In its Resolution dated August 30, 1977, 13 the respondent court set aside its decision and approved the compromise agreement.

As to the first ground invoked by Tan, now deceased, the respondent court ruled that the non-intervention of Tan's counsel of record in the compromise agreement does not affect the validity of the settlement on the ground that the client had an undoubted right to compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 14

As to the second ground, respondent court ruled as follows:

... it is relevant to note that Paragraph 1of the deed of assignment states that the cession,assignment, transfer, bond conveyance by Alfonso Tan was only by way of securing, or guaranteeing his obligation to GEORGE LITTON, SR.

Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, Civil Code).

"Even considered as a litigations credit," which indeed characterized the claims herein of Alfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil Code).

Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code, whereby the waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to George Litton, Sr. as assignee under the deed of assignment, may entitle Litton to pursue his remedies against Tan.

The alienation of a litigatious credit is further subject to the debtor's right of redemption under Article 1634 of the Civil Code.

As mentioned earlier, the assignor Tan died pending resolution of the motion for reconsideration. The estate of George Litton, Sr., petitioner herein, as represented by James Litton, son of George

Litton, Sr. and administrator 15of the former's estate, is now appealing the said resolution to this Court as assignee of the amount sued in Civil Case No. Q-8303, in relation to Civil Case No. 56850.

Before resolving the main issues aforementioned, the question of legal personality of herein petitioner to bring the instant petition for review, must be resolved.

As a rule, the parties in an appeal through a review on certiorari are the same original parties to the case. 16 If after the rendition of judgment the original party dies, he should be substituted by his successor-in-interest. In this case, it is not disputed that no proper substitution of parties was done. This notwithstanding, the Court so holds that the same cannot and will not materially affect the legal right of herein petitioner in instituting the instant petition in view of the tenor of the deed of assignment, particularly paragraph two thereof 17 wherein the assignor, Tan, assumed the responsibility to prosecute the case and to turn over to the assignee whatever amounts may be realized in the prosecution of the suit.

We note that private respondent moved for the dismissal of the appeal without notifying the estate of George Litton, Sr. whereas the former was fully aware of the fact that the said estate is an assignee of Tan's right in the case litigated. 18 Hence, if herein petitioner failed to observe the proper substitution of parties when Alfonso Tan died during the pendency of private respondent's motion for reconsideration, no one is to blame but private respondent himself. Moreover, the right of the petitioner to bring the present petition is well within the concept of a real party-in-interest in the subject matter of the action. Well-settled is the rule that a real party-in-interest is a party entitled to the avails of the suit or the party who would be injured by the judgment. 19 We see the petitioner well within the latter category.

Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to bring this petition in substitution of Tan.

Now, the resolution of the main issues.

The purpose of a compromise being to replace and terminate controverted claims, 20 courts encourage the same. A compromise once approved by final order of the court has the force of res judicata between parties and should not be disturbed except for vices of consent or forgery. 21

In this case, petitioner seeks to set aside the said compromise on the ground that previous thereto, Tan executed a deed of assignment in favor of George Litton, Sr. involving the same litigated credit.

We rule for the petitioner. The fact that the deed of assignment was done by way of securing or guaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the appellate court, will not in any way alter the resolution on the matter. The validity of the guaranty or pledge in favor of Litton has not been questioned. Our examination of the deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage. 22 Although it is true that Tan may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately dispose of the thing or the right given as security. The Court rules that the said provision should be read in consonance with Article 2097 of the same code. 23 Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of private respondent Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the former can only be alienated by the latter with due notice to and consent of Litton, Sr. or his duly

authorized representative. To allow the assignor to dispose of or alienate the security without notice and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit.

Moreover, under Article 1634, 24 the debtor has a corresponding obligation to reimburse the assignee, Litton, Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing in this, the alienation of the litigated credit made by Tan in favor of private respondent by way of a compromise agreement does not bind the assignee, petitioner herein.

Indeed, a painstaking review of the record of the case reveals that private respondent has, from the very beginning, been fully aware of the deed of assignment executed by Tan in favor of Litton, Sr. as said deed was duly submitted to Branch XI of the then Court of First Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303) where C.B.M. Products is one of the defendants and the parties were notified through their counsel. 25 As earlier mentioned, private respondent herein is the president of C.B.M. Products, hence, his contention that he is not aware of the said deed of assignment deserves scant consideration from the Court. Petitioner pointed out at the same time that private respondent together with his counsel were served with a copy of the deed of assignment which allegation remains uncontroverted. Having such knowledge thereof, private respondent is estopped from entering into a compromise agreement involving the same litigated credit without notice to and consent of the assignee, petitioner herein. More so, in the light of the fact that no reimbursement has ever been made in favor of the assignee as required under Article 1634. Private respondent acted in bad faith and in connivance with assignor Tan so as to defraud the petitioner in entering into the compromise agreement.

WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court dated August 30,1977 is hereby SET

ASIDE, the said compromise agreement being null and void, and a new one is hereby rendered reinstating its decision dated January 27, 1977, affirming in toto the decision of the lower court. This decision is immediately executory. No motion for extension of time to file a motion for reconsideration will be granted.

SO ORDERED.