Borbon vs Servicewide Specialists

SM: Car sold in installment basis, seller failed to deliver the type of car agreed upon. Seller assigned the PN to petitioner, Petitioner demands payment on the basis of PN, buyer refused to pay. Action for replevin has been instituted for the foreclosure of the vehicle in question. Court a quo also awarded liquidated damages and attorney’s fees in favor of buyer.

ISSUE: W/N award of liquidated damages is proper despite election for replevin as an alternative remedy for non payment of sale on installment basis

HELD: In their appeal to this Court, petitioners merely seek a modification of the decision of the appellate court insofar as it has upheld the court a quo in the award of liquidated damages and attorney's fees in favor of private respondent. Petitioners invoke the provisions of Article 1484 of the Civil Code which reads:

Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

The remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive,  2 which means, as so held in Nonato vs. Intermediate Appellate Court and Investor's Finance Corporation,  3 that —

. . . Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any of these three remedies — either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have been recognized as alternative, not cumulative, that the exercise of on e would bar the exercise of the others. 4

When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the deficiency,  5 and the seller-mortgagee is deemed to have renounced any right thereto.  6 A contrario, in the event of the seller-mortgagee first seeks, instead, the enforcement of the additional mortgages, guarantees or other security arrangements, he must be then be held to have lost by waiver or non-choice his lien on the chattel mortgage of the personal property sold by and mortgaged back to him, although, similar to an action for specific performance, he may still levy on it.

In ordinary alternative obligations, a mere choice categorically an unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be innefectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgmentcredit. 7 So, also, a mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, 8 but the repossession thereof by the vendor-mortgagee would have the effect of a foreclosure.

The parties here concede that the action for replevin has been instituted for the foreclosure of the vehicle in question (now in the possession of private respondent). The sole issue raised before us in this appeal is focused on the legal propriety of the affirmance by the appellate court of the awards made by the court a quo of liquidated damages and attorney's fees to private respondent. Petitioners hold that under Article 1484 of the Civil Code,

aforequoted, the vendor-mortgagee or its assignees loses any right "to recover any unpaid balance of the price" and any "agreement to the contrary (would be) void.

The argument is aptly made. In Macondray & Co. vs. Eustaquio, 9 we have said that the phrase "any unpaid balance" can only mean the deficiency judgment to which the mortgagee may be entitled to when the proceeds from the auction sale are insufficient to cover the "full amount of the secured obligations which . . . include interest on the principal, attorney's fees, expenses of collection, and the costs." In sum, we have observed that the legislative intent is not to merely limit the proscription of any further action to the "unpaid balance of the  principal" but, as so later ruled inLuneta Motor Co. vs. Salvador, 10 to all other claims that may be likewise be called in for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees.

In Filipinas Investment & Finance Corporation vs. Ridad 11 while we reiterated and expressed our agreement on the basic philosophy behind Article 1484, we stressed, nevertheless, that the protection given to the buyer-mortgagor should not be considered to be without circumscription or as being preclusive of all other laws or legal principles. Hence, borrowing from the examples made in Filipinas Investment, where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, that thereby constrained the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney's fees, could rightly be awarded.

Given the circumstances, we must strike down the award for liquidated damages made by the court a quobut we uphold the grant of attorney's fees which we, like the appellate court, find it to be reasonable. Parenthetically, while the promissory note may appear to have been a negotiable instrument, private respondent, however, clearly cannot claim unawareness of its accompanying documents so as to thereby gain a right greater than that of the assignor.

Cebu Autometic Motors vs General Milling Corp

GMC, CAMI violated the provisions of the lease contract when: a) CAMI subleased a portion of the leased premises without securing GMC’s prior written consent; b) CAMI introduced improvements to the leased premises without securing GMC’s consent; and c) CAMI did not deliver the required advance rental and deposit to GMC upon the execution of the lease contract.

GMC sent CAMI a letter informing the latter that it was terminating the lease contract and demanding that CAMI vacate the premises and settle all its unpaid accounts before the end of that month

On the issue of demand

GMC claims that CAMI belatedly raised the issue of lack of demand. On the other hand, CAMI contends in its Motion to Admit Reply10 that it raised this defense as early as its Answer before the MTCC.

We agree with CAMI. The MTCC decision, which quoted CAMI’s Answer extensively, clearly shows that CAMI stated that it will be in default with respect to the advance rental and deposit only after GMC has made a demand for the payment. CAMI also stated that it had already deposited the advance rental and deposit with the Clerk of Court of the MTCC. Lastly, CAMI denied GMC’s claim in its complaint that a demand had been made.11 These statements, taken together, clearly belie GMC’s claim that CAMI never raised the lack of demand as an issue before the lower court.

Another issue raised, relating to demand, is whether GMC sent CAMI the required demand letter. Invoking Article 1169 of the Civil Code,12 CAMI principally contends that it could not be considered in default because GMC never sent a proper demand letter.

CAMI, in invoking Article 1169, apparently overlooked that what is involved is not a mere mora or delay in the performance of a generic obligation to give or to do that would eventually lead to the remedy of rescission or specific performance. What is involved in the case is a contract of lease and the twin remedies of rescission and judicial ejectment after either the failure to pay rent or to comply with the conditions of the lease. This situation calls for the application, not of Article 1169 of the Civil Code but, of Article 1673 in relation to Section 2, Rule 70 of the Rules of Court. Article 1673 states:

Article 1673. The lessor may judicially eject the lessee for any of the following causes:

x x x x

(3) Violation of any of the conditions agreed upon in the contract; xxx

Based on this provision, a lessor may judicially eject (and thereby likewise rescind the contract of lease) the lessee if the latter violates any of the conditions agreed upon in the lease contract. Implemented in accordance with Section 2, Rule 70, the lessor is not required to first bring an action for rescission, but may ask the court to do so and simultaneously seek the ejecment of the lessee in a single action for unlawful detainer.13 Section 2, Rule 70 of the Rules of Court provides:

Sec. 2. Lessor to proceed against lessee only after demand.

Unless otherwise stipulated, such action by the lessor shall be commenced only after demand to pay or comply with the conditions of the lease and to vacate is made upon the lessee, or by serving written notice of such demand upon the person found on the premises, or by posting such notice on the premises if no person be found thereon, and the lessee fails to comply therewith after fifteen (15) days in the case of land or five (5) days in the case of buildings. [Emphasis supplied.]

GMC insists that it complied with the required demand when it sent CAMI the following letter:

xxx

With this demand letter as evidence, we hold it undisputed that GMC did serve a prior demand on CAMI. The question, however, is whether this is the demand that Section 2, Rule 70 of the Rules of Court contemplates as a jurisdictional requirement before a lessor can undertake a judicial ejectment pursuant to Article 1673 of the Civil Code.

Section 2, Rule 70, on its face, involves two demands that may be made in the same demand letter, namely, (1) the demand for payment of the amounts due the lessor, or the compliance with the conditions of the lease, and (2) the demand to vacate the premises. These demands, of course, are not intended to be complied with at the same time; otherwise, the provision becomes contradictory as it is pointless to demand payment or compliance if the demand to vacate is already absolute and must be heeded at the same time as the demand to pay or to comply. It is only after the demands for payment or compliance are made on the lessee and subsequently rejected or ignored that the basis for the unlawful detainer action arises.

The twin aspects of the demand letter can best be understood when Section 2, Rule 70 is read and understood as the specific implementing procedural rule to carry out the results that Article 1673 mandates – the rescission of the contract of lease and the judicial ejectment of the lessee. The judicial rescission of a contract of lease is essentially governed by Article 1659 of the Civil Code, grounded on the breach of the parties’ statutory obligations: in the case of the lessee, for its failure to pay the rent or to use the property under lease for the purpose it was intended. Article 1673, read with Section 2, Rule 70 of the Rules, does away with the need for an independent judicial action to rescind prior to ejectment by combining these remedies in an unlawful detainer action.

The law of contracts (essentially, Articles 1191 of the Civil Code for judicial rescission and Article 1659 for the judicial rescission of lease agreements) firmly establishes that the failure to pay or to comply with the contractual term does not, by itself, give rise to a cause of action for rescission; the cause of action only accrues after the lessee has been in default for its failure to heed the demand to pay or to comply.14 With the contract judicially rescinded, the demand to vacate finds full legal basis.

Article 1673, implemented pursuant to Section 2, Rule 70, does away with a separate judicial action for rescission, and allows under a single complaint the judicial ejectment of the lessee after extrajudicial rescission has taken place. These combined remedies account for the separate aspects of the demand letter: the demand to pay rentals or to comply with the terms of the lease, and to vacate. The tenant's refusal to heed the demand to vacate, coming after the demand to pay or to comply similarly went unheeded, renders unlawful the continued possession of the leased premises; hence, the unlawful detainer action.15

In Dio v. Concepcion, we ruled that:

Under Article 1673 of the Civil Code, the lessor may judicially eject the lessee for, among other causes: (1) lack of payment of the price stipulated; or (2) violation of any of the conditions agreed upon in the contract. Previous to the institution of such action, the lessor must make a demand upon the lessee to pay or comply with the conditions of the lease and to vacate the premises. It is the owner’s demand for the tenant to vacate the premises and the tenant’s refusal to do so which makes unlawful the withholding of possession.16 Such refusal violates the owner’s right of possession giving rise to an action for unlawful detainer. [Emphasis supplied.]

Mr. Justice Jose Vitug further explained the Court’s action in this case in his Separate Opinion when he said:

I just would like to add, by way of clarification, that the principal remedies open to an obligee, upon the breach of an obligation, are generally judicial in nature and must be independently sought in litigation, i.e., an action for performance (specific, substitute or equivalent) or rescission (resolution) of a reciprocal obligation. The right to rescind (resolve) is recognized in reciprocal obligations; it is implicit, however, in third paragraph of Article 1191 of the Civil Code that the rescission there contemplated can only be invoked judicially. Hence, the mere failure of a party to comply with what is incumbent upon him does not ipso jure produce the rescission (resolution) of the obligation.

Exceptionally, under the law and, to a limited degree, by agreement of the parties, extrajudicial remedies may become available such as, in the latter case, an option to rescind or terminate a contract upon the violation of a resolutory facultative condition. In the case of lease agreements, despite the absence of an explicit stipulation, that option has been reserved by law in favor of a lessee under Article 1673 of the Civil Code by providing that the lessor may judicially eject the lessee for, among other grounds, a violation of any of the conditions agreed upon in the contract. The provision, read in conjunction with Section 2, Rule 70, of the 1997 Rules of Civil Procedure, would, absent a contrary stipulation, merely require a written demand on the lessee to pay or to comply with the conditions of the lease and to vacate the premises prior to the institution of an action for ejectment. The above provisions, in effect, authorizes the lessor to terminate extrajudicially the lease (with the same effect as rescission) by simply serving due notice to the lessee.

In this particular instance, therefore, the only relevant court jurisdiction involved is that of the first level court in the action for ejectment, an independent judicial action for rescission being unnecessary.

Thus, as further clarified, an extrajudicial rescission gave rise to the demand to vacate that, upon being refused, rendered the possession illegal and laid the lessee open to ejectment. The rescission, an extrajudicial one, was triggered by the lessee’s refusal to pay the rent or to comply with the terms of the lease. The Court put it in plainer terms in Arquelada v. Philippine Veterans Bank:17 where it said:

As contemplated in Section 2, the demand required is the demand to pay or comply with the conditions of the lease and not merely a demand to vacate. Consequently, both demands - either to pay rent or adhere to the terms of the lease and vacate are necessary to make the lessee a deforciant in order that an ejectment suit may be filed. It is the lessor's demand for the lessee to vacate the premises and the tenant's refusal to do so which makes unlawful the withholding of the possession. Such refusal violates the lessor's right of possession giving rise to an action for unlawful detainer. However, prior to the institution of such action, a demand from the lessor to pay or comply with the conditions of the lease and to vacate the premises is required under the aforequoted rule. Thus, mere failure to pay the rents due or violation of the terms of the lease does not automatically render a person's possession unlawful. Furthermore, the giving of such demands must be alleged in the complaint, otherwise the MTC cannot acquire jurisdiction over the case. [Emphasis supplied.]

A close examination of GMC’s letter to CAMI tells us that the letter merely informed recipient CAMI that GMC had terminated the lease based on the cited violations of the terms of the lease, and on the basis of this termination, required CAMI to vacate the premises by the end of the month. In other words, the letter did not demand compliance with the terms of the lease; GMC was past this point as it had rescinded the contract of lease and was already demanding that the leased premises be vacated and the amounts owing be paid. Thus, whether or not the amounts due were paid, the lease remained terminated because of the cited violations.

From this perspective, GMC did not fully comply with the requirements of Section 2, Rule 70.1âwphi1 Technically, no extrajudicial rescission effectively took place as a result of the cited violations until the demand to pay or comply was duly served and was rejected or disregarded by the lessee. This aspect of the demand letter – missing in the demand letter and whose rejection would have triggered the demand to vacate – gave GMC no effective cause of action to judicially demand the lessee’s ejectment. All these, the appellate court unfortunately failed to appreciate.

Our above conclusion renders unnecessary any further ruling on the merits of the parties’ positions on the existence of the substantive grounds for rescission and ejectment.

JOINT AND SOLIDARY OBLIGATIONS

Lafarge Cement vs Continental Cement

May defendants in civil cases implead in their counterclaims persons who were not parties to the original complaints?

Obligations may be classified as either joint or solidary. "Joint" or "jointly" or "conjoint" means mancum or mancomunada or pro rata obligation; on the other hand, "solidary obligations" may be used interchangeably with "joint and several" or "several." Thus, petitioners' usage of the term "joint and solidary" is confusing and ambiguous.

The ambiguity in petitioners' counterclaims notwithstanding, respondents' liability, if proven, is solidary. This characterization finds basis in Article 1207 of the Civil Code, which provides that obligations are generally considered joint, except when otherwise expressly stated or when the law or the nature of the obligation requires solidarity. However, obligations arising from tort are, by their nature, always solidary. We have assiduously maintained this legal principle as early as 1912 in Worcester v. Ocampo,30 in which we held:

"x x x The difficulty in the contention of the appellants is that they fail to recognize that the basis of the present action is tort. They fail to recognize the universal doctrine that each joint tort feasor is not only individually liable for the tort in which he participates, but is also jointly liable with his tort feasors. x x x

"It may be stated as a general rule that joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit. They are each liable as principals, to the same extent and in the same manner as if they had performed the wrongful act themselves. x x x

"Joint tort feasors are jointly and severally liable for the tort which they commit. The persons injured may sue all of them or any number less than all. Each is liable for the whole damages caused by all, and all together are jointly liable for the whole damage. It is no defense for one sued alone, that the others who participated in the wrongful act are not joined with him as defendants; nor is it any excuse for him that his participation in the tort was insignificant as compared to that of the others. x x x

"Joint tort feasors are not liable pro rata. The damages can not be apportioned among them, except among themselves. They cannot insist upon an apportionment, for the purpose of each paying an aliquot part. They are jointly and severally liable for the whole amount. x x x

"A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any claim which might exist against the others. There can be but satisfaction. The release of one of the joint tort feasors by agreement generally operates to discharge all. x x x

"Of course the court during trial may find that some of the alleged tort feasors are liable and that others are not liable. The courts may release some for lack of evidence while condemning others of the alleged tort feasors. And this is true even though they are charged jointly and severally."

In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or "joint and several" obligation, the relationship between the active and the passive subjects is so close that each of them must comply with or demand the fulfillment of the whole obligation.31 The fact that the liability sought against the CCC is for specific performance and tort, while that sought against the individual respondents is based solely on tort does not negate the solidary nature of their liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this point:

"Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions."

The solidary character of respondents' alleged liability is precisely why credence cannot be given to petitioners' assertion. According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on grounds

that pertain solely to its individual co-debtors.32 In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of the obligation, from circumstances personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil Code provides:

"A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible." (Emphasis supplied).

The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim on grounds that pertain only to its individual co-debtors -- is therefore allowed.

However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it be dismissed. Be that as it may, Respondent CCC cannot be declared in default. Jurisprudence teaches that if the issues raised in the compulsory counterclaim are so intertwined with the allegations in the complaint, such issues are deemed automatically joined.33 Counterclaims that are only for damages and attorney's fees and that arise from the filing of the complaint shall be considered as special defenses and need not be answered.34

CCC's Motion to Dismiss the Counterclaim on Behalf of Respondents Lim and Mariano Not Allowed

While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that pertain to individual defendants Lim and Mariano, it cannot file the same Motion on their behalf for the simple reason that it lacks the requisite authority to do so. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their behalf, without being so authorized. Thus, unless expressly adopted by Lim and Mariano, the Motion to Dismiss the compulsory counterclaim filed by Respondent CCC has no force and effect as to them.

In summary, we make the following pronouncements:

1. The counterclaims against Respondents CCC, Gregory T. Lim and Anthony A. Mariano are compulsory.

2. The counterclaims may properly implead Respondents Gregory T. Lim and Anthony A. Mariano, even if both were not parties in the original Complaint.

3. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include, in a Motion to Dismiss, defenses available to their co-defendants; nevertheless, the same Motion cannot be deemed to have been filed on behalf of the said co-defendants.

4. Summons must be served on Respondents Lim and Mariano before the trial court can obtain jurisdiction over them.

De Castro vs CA

Artigo sued petitioners De Castros to collect the unpaid balance of his broker's commission from the De Castros.

Xxx

Constante signed the note as owner and as representative of the other co-owners. Under this note, a contract of agency was clearly constituted between Constante and Artigo. Whether Constante appointed Artigo as agent, in Constante's individual or representative capacity, or both, the De Castros cannot seek the dismissal of the case for failure to implead the other co-owners as indispensable parties. The De Castros admit that the other co-owners are solidarily liable under the contract of agency,10 citing Article 1915 of the Civil Code, which reads:

Art. 1915. If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable to the agent for all the consequences of the agency.

The solidary liability of the four co-owners, however, militates against the De Castros' theory that the other co-owners should be impleaded as indispensable parties. A noted commentator explained Article 1915 thus –

"The rule in this article applies even when the appointments were made by the principals in separate acts, provided that they are for the same transaction. The solidarity arises from the common interest of the principals, and not from the act of constituting the agency. By virtue of this solidarity, the agent can recover from any principal the whole compensation and indemnity owing to him by the others. The parties, however, may, by express agreement, negate this solidary responsibility. The solidarity does not disappear by the mere partition effected by the principals after the accomplishment of the agency.

If the undertaking is one in which several are interested, but only some create the agency, only the latter are solidarily liable, without prejudice to the effects of negotiorum gestio with respect to the others. And if the power granted includes various transactions some of which are common and others are not, only those interested in each transaction shall be liable for it."11

When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in a contract of agency, each obligor may be compelled to pay the entire obligation.12 The agent may recover the whole compensation from any one of the co-principals, as in this case.

Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of the solidary debtors. This article reads:

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co., Inc.13 that –

"x x x solidarity does not make a solidary obligor an indispensable party in a suit filed by the creditor . Article 1216 of the Civil Code says that the creditor `may proceed against anyone of the solidary debtors or some or all of them simultaneously'." (Emphasis supplied)

Malayan Insurance vs CA

SM: Contract of Insurance

Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan. He prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees.

As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.

We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.

It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months.

If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which reads:

Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible.

xxx xxx xxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged ill any business or industry.

xxx xxx xxx

The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all the diligence of a good father of a family to prevent damage.

It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. 4

On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident.

In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary obligation and insurance contracts.

In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors.  7 On the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event." 8

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.

As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance existing between petitioner and respondent Sio Choy. We disagree.

The appellate court overlooked the principle of subrogation in insurance contracts. Thus —

... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon , nor does it grow out of any privity of contract  (emphasis supplied) or upon written assignment of claim, and payment to the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.

xxx xxx xxx

In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.

Diamond Builders vs Country Bankers

SM: breach of obligation to construct a residential and commercial building

ISSUE: Whether petitioners should indemnify Country Bankers for the payment of the surety bond.

In fine, petitioners contend that Country Bankers is not entitled to reimbursement when it voluntarily paid the surety bond considering it knew full well the remedies availed of by petitioners to stay the execution of the compromise judgment. Thus, Country Bankers must bear the loss or damage arising from its voluntary act.

We deny the appeal and affirm the appellate court’s ruling. Country Bankers should be reimbursed for theP370,000.00 it paid to Borja under the surety bond.

In impugning the CA’s decision, petitioners invoke their pending Omnibus Motion to stay the execution of the compromise judgment. Petitioners’ theory is that, although the RTC Caloocan had already issued a writ of execution and Country Bankers had been served a Notice of Levy/Sheriff’s Sale of its properties at the impending public auction, the payment made by Country Bankers to Borja is a voluntary act. Petitioners push their theory

even further, and deign to suggest that Country Bankers should have itself intervened in the proceedings before the RTC Caloocan to stay the writ of execution.

We reject this preposterous suggestion. Petitioners ought to be reminded of the nature of a judgment on a compromise and a writ of execution issued in connection therewith.

A compromise judgment is a decision rendered by a court sanctioning the agreement between the parties concerning the determination of the controversy at hand. Essentially, it is a contract, stamped with judicial imprimatur, between two or more persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and which each of them prefers in the hope of gaining, balanced by the danger of losing.22 Upon court approval of a compromise agreement, it transcends its identity as a mere contract binding only upon the parties thereto, as it becomes a judgment that is subject to execution in accordance with Rule 39 of the Rules of Court.23

Ordinarily, a judgment based on compromise is not appealable. It should not be disturbed except upon a showing of vitiated consent or forgery. The reason for the rule is that when both parties enter into an agreement to end a pending litigation and request that a decision be rendered approving said agreement, it is only natural to presume that such action constitutes an implicit, as undeniable as an express, waiver of the right to appeal against said decision.24 Thus, a decision on a compromise agreement is final and executory, and is conclusive between the parties.25

It is beyond cavil that if a party fails or refuses to abide by a compromise agreement, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.26 Following this mandatory rule, the RTC Caloocan granted Borja’s motion, and subsequently issued an order to the sheriff to execute the compromise judgment. Notwithstanding the foregoing, petitioners still maintain that since they had taken steps to stay the execution of the compromise judgment, Country Bankers, with full knowledge of their active opposition to the execution thereof, should not have readily complied with the RTC Caloocan Order.

Petitioners’ argument contemplates a brazen defiance of a validly issued court order, which had not been restrained by the appellate court or this Court. The argument is unacceptable.

The Compromise Agreement between Borja and Rogelio explicitly provided that the latter’s failure to complete construction of the building within the stipulated period27 shall cause the full implementation of the surety bond as a penalty for the default, and as an award of damages to Borja. Furthermore, the Compromise Agreement contained a default executory clause in case of a violation or avoidance of the terms and conditions thereof. Therefore, the payment made by Country Bankers to Borja was proper, as failure to pay would have amounted to contumacious disobedience of a valid court order.

Clearly, even without the aforesaid default clause, the compromise judgment remained executory as against Rogelio, as the principal obligor (co-debtor), and Country Bankers as surety of the obligation. Section 4, Rule 39 of the Rules of Court provides:

SEC. 4. Judgments not stayed by appeal. – Judgments in actions for injunction, receivership, accounting and support, and such other judgments as are now or may hereafter be declared to be immediately executory, shall be enforceable after their rendition and shall not be stayed by an appeal taken therefrom, unless otherwise ordered by the trial court. On appeal therefrom, the appellate court in its discretion may make an order suspending, modifying, restoring or granting the injunction, receivership, accounting, or award of support.

The stay of execution shall be upon such terms as to bind or otherwise as may be considered proper for the security or protection of the rights of the adverse party.

Other judgments in actions declared to be immediately executory and not stayed by the filing of an appeal are for: (1) compromise,28 (2) forcible entry and unlawful detainer,29 (3) direct contempt,30 and (4) expropriation.31

Likewise, Section 9, paragraph (a),32 of the same Rule outlines the procedure for execution of judgments for money, thus:

SEC. 9 Execution of judgments for money, how enforced. –

(a) Immediate payment on demand. – The officer shall enforce an execution of a judgment for money by demanding from the judgment obligor the immediate payment of the full amount stated in the writ of execution and all lawful fees. The judgment obligor shall pay in case, certified bank check payable to the judgment oblige, or any other form of payment acceptable to the latter, the amount of the judgment debt under proper receipt directly to the judgment oblige or his authorized representative if present at the time of payment. The lawful fees shall be handed under proper receipt to the executing sheriff who shall turn over the said amount within the same day to the clerk of court of the court that issued the writ.

As Rogelio’s obligation under the compromise agreement, and approved by the RTC Caloocan, had a penal clause33 which is monetary in nature,34 the writ of execution availed of by Borja, and paid by Country Bankers, strictly complied with the rules on execution of money judgments.

It is true that the petitioners did not directly question the compromise judgment. What was pending before the Caloocan RTC was petitioners’ Omnibus Motion praying for a stay in the implementation of the writ of execution. However, the bottom line issue raised in the Omnibus Motion is, actually, a question on the compromise judgment, since its resolution would require an inquiry into the stipulations contained in the Compromise Agreement, particularly the provision on immediate execution.

Thus, when the RTC Manila ruled that the payment on the bond made by Country Bankers was voluntary, the lower court effectively disregarded the rule on the non-appealable nature and the immediately executory character of a judgment on a compromise.

Moreover, it has not escaped our attention that petitioners belatedly filed a Petition for Certiorari and Prohibition with prayer for a TRO with the CA, ostensibly to stop the execution of the compromise judgment. Not only was the filing thereof late, it was done twelve (12) days after the satisfaction of the compromise judgment. We are, therefore, perplexed why, despite the urgency of the matter, petitioners merely banked on a pending motion for reconsideration to stay the enforcement of an already issued writ of execution. Petitioners’ total reliance thereon was certainly misplaced.

Admittedly, the general rule is that certiorari will not lie unless a motion for reconsideration is first filed before the respondent tribunal to allow it an opportunity to correct the imputed errors.35 Nonetheless, the rule admits of exceptions, thus:

(a) where the order is a patent nullity, as where the court a quo has no jurisdiction;

(b) where the questions raised in the certiorari proceedings have been duly raised and passed upon by the lower court, or are the same as those raised and passed upon in the lower court;

(c) where there is an urgent necessity for the resolution of the question and any further delay would prejudice the interests of the Government or of the petitioner or the subject matter of the action is perishable;

(d) where, under the circumstances, a motion for reconsideration would be useless;

(e) where petitioner was deprived of due process and there is extreme urgency for relief;

(f) where, in a criminal case, relief from an order of arrest is urgent and the granting of such relief by the trial court is improbable;

(g) where the proceedings in the lower court are a nullity for lack of due process;

(h) where the proceedings was ex-parte or in which the petitioner had no opportunity to object; and

(i) where the issue raised is one purely of law or where public interest is involved.36

Evidently, it would not have been premature for petitioners to have filed a petition before the CA, upon the issuance by the RTC Caloocan of a writ of execution, because the RTC Caloocan already denied their Opposition to Borja’s Motion for Execution on the surety bond. If, as petitioners insist, they had a meritorious challenge to the satisfaction of the writ of execution, they should have immediately filed a Petition for Certiorari with the CA and

therein alleged the exceptional circumstance warranting the non-filing of a motion for reconsideration. Petitioners should not have persisted on waiting for the resolution of their Omnibus Motion.

We have consistently ruled that an order for the issuance of a writ of execution is ordinarily not appealable. The reason for this is that the merits of the case should not be delved into anew after a determination has been made thereon with finality.37 Otherwise, there would be practically no end to litigation since the losing party would always try to thwart execution by appealing from every order granting the writ. In this case, this aphorism should apply. Rogelio, after agreeing to an amicable settlement with Borja to put an end to the case before the RTC Caloocan, cannot flout compliance of the court order of execution by refusing to reimburse Country Bankers, the surety of his obligation in the compromise agreement.

Still, petitioners stubbornly refuse to pay Country Bankers, contending that the CA itself, in CA-G.R. SP No. 28205, declared that the payment effected was voluntary.

We are not persuaded.

Article 2047 of the Civil Code specifically calls for the application of the provisions on solidary obligations to suretyship contracts. In particular, Article 1217 of the Civil Code recognizes the right of reimbursement from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). 38 In contrast, Article 1218 of the Civil Code is definitive on when reimbursement is unavailing, such that only those payments made after the obligation has prescribed or became illegal shall not entitle a solidary debtor to reimbursement. Nowhere in the invoked CA Decision does it declare that a surety who pays, by virtue of a writ of execution, is not entitled to reimbursement from the principal co-debtor. The CA Decision was confined to the mootness of the issue presented and petitioners’ preclusion from the relief it prayed for, i.e., a stay of the writ of execution, considering that the writ had already been satisfied.

More importantly, the Indemnity Agreement signed by Rogelio and the other petitioners explicitly provided for an incontestability clause on payments made by Country Bankers.1âwphi1 The said clause reads:

INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: - Any payment or disbursement made by [Country Bankers] on account of the above-mentioned Bond, its renewals, extensions, alterations or substitutions either in the belief that [Country Bankers] was obligated to make such payment or in the belief that said payment was necessary or expedient in order to avoid greater losses or obligations for which [Country Bankers] might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions, alterations, or substitutions, shall be final and shall not be disputed by the undersigned, who hereby jointly and severally bind themselves to indemnify [Country Bankers] of any and all such payments, as stated in the preceding clauses.

In case [Country Bankers] shall have paid, settled or compromised any liability, loss, costs, damages, attorney’s fees, expenses, claims, demands, suits, or judgments as above-stated, arising out of or in connection with said bond, an itemized statement thereof, signed by an officer of [Country Bankers] and other evidence to show said payment, settlement or compromise, shall be prima facie evidence of said payment, settlement or compromise, as well as the liability of [petitioners] in any and all suits and claims against [petitioners] arising out of said bond or this bond application.

Ineluctably, petitioners are obligated to reimburse Country Bankers the amount of P370,000.00.

Finally, petitioners desperately attempt to inveigle out of this burden, which is of their own making, by imputing a lack of initiative on Country Banker’s part to intervene in the execution proceedings before the RTC.

This contention, as with the rest of petitioners’ arguments, deserves scant consideration. Suffice it to state that Country Bankers is a surety of the obligation with a penal clause, constituted in the compromise judgment; it is not a joint and solidary co-debtor of Rogelio.

In the recent case of Escaňo v. Ortigas,39 we elucidated on the distinction between a surety as a co-debtor under a suretyship agreement and a joint and solidary co-debtor, thus:

(A)s indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does not bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same

obligation. At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact "become subrogated to all the rights and remedies of the creditor."

DIVISIBLE AND INDIVISIBLE OBLIGATIONS

PNB vs Amores

SM: declaratory relief

Kalaw obtained a loan from defendant Philippine National Bank, hereinafter referred to as PNB, in the amount of 150,000.00, and in order to secure the said loan the aforesaid property was mortgaged to defendant PNB.

A portion of said property, with an area of 45.186 hectares, was subjected to Operations Land Transfer in favor of tenants-beneficiaries in accordance with Presidential Decree No. 27 and the provisions of Republic Act No. 3844 (otherwise known as the Code of Agrarian Reform of the Philippines), as amended more particularly by Presidential Decree No. 251

As of the date of July 28, 1977 defendant Land Bank of the Philippines, hereinafter referred to as LBP, paid defendant PNB for the account of the plaintiffs P14,588.50 in cash and Land Bank Bonds with a total face value of P130,000.00.

Pursuant to PNB Board Resolution, PNB, after crediting the sum of P 14,588.50 to the account of plaintiff Augusto Kalaw, applied the land Bank bonds to the payment of the account on a one-to-one basis to the extent of P31,000.00 and on a discounted basis to the extent of P59,400.00, or a total of P90,400,00.

Contesting the manner of application of Land Bank bonds to the payment of loan obligations pursuant to Board Resolution plaintiffs herein wrote the PNB requesting the reconsideration or revision of its policy.

Defendant PNB, however, did not find merit in the request of plaintiffs but agreed that the latter seek judicial ruling to which it would abide.

Defendant LBP has directly taken issue with the co-defendant PNB on the aforementioned policy.

As a consequence, plaintiffs brought the present action for declaratory relief

ISSUE: whether or not a government lending institution (like PNB, the petitioner herein) may be compelled to accept land Bank notes at face value in payment of pre-existing obligations secured be, land partially taken by the Land Bank under Operation Land Transfer pursuant to the Agrarian Reform Code

HELD: The petitioner Philippine National Bank (PNB) appealed from the decision of the lower court and assigned several errors. However, there is, in fact, only one question to be resolved here, i.e., whether or not a government lending institution (like PNB, the petitioner herein) may be compelled to accept land Bank notes at face value in payment of pre-existing obligations secured be, land partially taken by the Land Bank under Operation Land Transfer pursuant to the Agrarian Reform Code (RA No. 3844 as amended particularly be Id. No. 251).

The petitioner PNB, relating PD 27 with Section 80 of the Agrarian Reform Code, as amended particularly by PD 251, affirms that lands not subject to PD 27 are also not subject to Section 80. Necessarily, therefore, when land mortgaged to PNB is partly subjected to PD 27, only that part also of the corresponding lien is subjected to Section 80, the unaffected portion being governed by the PNB charter.

The petitioner's interpretation not only unduly stretches the scope of PD 251 but is also antithetical to the objectives of the land reform program. Analyzing both laws, we see that PD 27 effects emancipation of the tenant-farmer from the bondage of the soil while Section 80 provides the mode of bankrolling the emancipation measure. As soon as the tenant-farmer acquires ownership over the land, he is deemed emancipated and the objective of PD 27 is attained. But the previous owner of the land taken still has to be compensated. This is then the moment when Section 80 comes into play, i.e., in providing for the mode of determining the value or cost of the acquisition of the land subjected to PD 27. From the above, we see that the only correlation that Section 80 has with PD 27 is

to the extent of determining the cost of the land transferred to the tenant-farmer. The method for effecting the release of the whole encumbered estate, which naturally includes the portions not subjected to PD 27, if there are any, does not fall within the ambit of both decrees. This being the case, there is, therefore, no reason to decrease the effective value of the Land Bank bonds, for that would be the inevitable result if the full application of their face value is pro tanto limited only to that portion of the land subjected to PD 27 and discounted with respect to those portions which were not taken by the Land Bank.

At this point, it must be stressed that Land Bank bonds are deemed "contracts and the obligations resulting therefrom fall within the purview of the non-impairment clause of the constitution and any impairment thereof becomes an encroachment upon the obligation itself which cannot be permitted." 5

Suffice it to mention that the petitioner is a government lending institution and as such, it has the obligation to support unequivocably government programs already on stream and not to introduce its own interpretative policies which may thwart such programs or modify them to nothingness. This is specially compelling with regard to land reform, the great venture of the government.

The preamble of PD 251 eloquently articulates government intent to implement the state policy of "diverting landlord capital in agriculture to industrial development" by "mobilizing and harnessing properly all available government resources for the realization of the desired agrarian reform program." 6 For agrarian reform cannot be fully realized without the intervention of the government particularly in the payment of just compensation. Surely, the tenant by himself does not have and can not afford the wherewithal to defray the cost of the land transferred to him. It is only with the full support and active assistance of the government principally through its financial institutions that payment of just compensation to the landowner may be realized. The petitioner PNB is one of the government resources contemplated in the said preamble.

In a country, like ours, which still espouses democratic Ideals, but which Ideals are threatened by extreme and radical forces, the early and full implementation of the government's land reform program sans complications and technicalities may yet save the nation and keep democracy alive. The petitioner, a premier government lending institution must perform its part. In the implementation of the financing portion of this laudable program, the PNB must not pinch centavos.

Moreover, explicit is the law that a mortgage obligation is one and indivisible. 7 Every portion of the property mortgaged is answerable for the whole obligation as soon as the latter falls due. The mortgagor cannot opt, much less compel the mortgagee, to apply any payment made by him on a specific portion of the mortgaged property to effect release. Neither may the mortgagee apply payments made to it on, and consequently release, a portion of the mortgaged property and effect foreclosure on the rest. From the foregoing, it is clear that petitioner PNB cannot be allowed to do precisely what it had done in the case at bar.

The petitioner's method evidently contravenes the principle of indivisibility of mortgage for it applied the Land Bank bonds as payment on a one-to-one basis pro tanto of the mortgage debt secured by the particular portion acquired by the Land Bank which had an area of 45.186 hectares, but on a discounted basis with respect to the other portions of the debt secured by the same mortgage.

Furthermore, and as correctly noted by the trial court, Section 80 of the Agrarian Reform Code does not distinguish between land wholly subjected to agrarian reform and land only partially affected thereby. Applying the rule on statutory construction, "Ubi lex non distinguit, nec nos distinguere debemos," 10 this Court must perforce follow the meaning expressed by the words of the law.

The pertinent legal provision states.

SEC. 80. Modes of Payment. — The Bank shall finance the acquisition of farm lots under any of the following modes of settlement:

1. Cash payment of 10% and balance in 25-year tax-free 6% Land Bank bonds:

xxx xxx xxx

In the event there is an existing lien or encumbrance on the land in favor of any Government lending institution at the time of acquisition by the Bank, the landowner shall be paid the net value of the land (i.e., the value of the land determined under Proclamation No. 27 minus the

outstanding balance/s) of the obligations secured by the liens/ or encumbrances), and the outstanding balance/s of the obligations to the lending institution/s shall be paid by the Land Bank in Land Bank bonds or other securities, existing charters of those institutions to the contrary notwithstanding. A similar settlement may be negotiated by the Land Bank in the case of obligations secured by liens or encumbrances in favor of private parties or institutions.

There is nothing in the above quoted provision of law which authorizes a government lending institution to make a distinction in its acceptance of land bank bonds as payment. There is also nothing in the said law which can be construed to mean that when the area actually "land reformed" is just a portion of the property encumbranced, only that portion of the loan value corresponding to the area actually taken will be paid with Land Bank bonds at their face value.

The law, in fact, is clear, i.e., that the debt secured by a mortgage constituted on the land taken under the Agrarian Reform Code shall be paid in land Bank bonds even if the charters of government lending institutions contain provisions contrary to Section 80. The last sentence of the law in question which provides that "a similar settlement may be negotiated," applies only to obligations contracted with private parties or institutions but not those contracted with government lending institutions like the petitioner herein.

From the foregoing, there is no doubt that the petitioner PNB, as a government lending institution, is obliged to accept payments made to it by the private respondents, through the land Bank, in the form of Land Bank bonds at their par or face value. The petitioner may not discount said payments but must apply the full face value of the bonds on the outstanding balance.

OBLIGATION WITH PENAL CLAUSE

Garcia vs CA

We find no material questions of facts tendered by these defenses as to the main issue on whether or not the petitioners can be held liable to the respondent bank under their indemnity agreements.

The issue tendered in the first defense is "sham and fictitious" in the light of the terms of the indemnity agreements. Thus, under the indemnity agreements, the petitioners bound themselves jointly and severally with Chemark in favor of the respondent bank for the payment, upon demand and without benefit of excussion, of whatever amount or amounts Chemark may be indebted to the respondent bank under and by virtue of the credit accommodations. (Emphasis supplied) The economic conditions of the country are immaterial to the issue on the liability of the petitioners under their indemnity agreements.

The issue raised in the second defense, on whether or not the indemnity agreements were intended as collaterals for future Chemark loans is likewise sham and fictitious. Under the indemnity agreements, the petitioners bound themselves to pay whatever amount Chemark may be indebted to the bank "under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) ... (Emphasis supplied)

The argument as to whether or not Dynetics' execution of the indemnity agreement is contrary to its purposes and therefore ultra vires and unenforceable against it does not tender a genuine issue. The record shows that Dynetics was authorized to execute the indemnity agreements evidenced by the Corporate Secretary's certificate (p. 38, 264 Original Records).

This was not rebutted.

Indeed, we find no genuine issues raised in the complaint which can not be resolved by the pleadings, admissions and the affidavit of Charis Marquez submitted to the court. As the appellate court said:

Dynetics, Garcia and Matrix attempted to avoid liability by trying hard to create factual issues fit for trial. The attempt is but a hodgepodge of legal arguments and conclusions which can be resolved without the rituals of trial. Thus, Dynetics urges that there is need for trial to determine whether it can be compelled to pay considering that SEC by its Order of September 27, 1984 has prohibited Chemark from paying its creditors. The issue is strictly legal and can be decided by determining the character of liability of Dynetics as joint and solidary debtor. Dynetics also argues that it raised the issue of lack of consideration which must be tried on the merits. The issue

deserves scant consideration for the parties' Indemnity Agreement specifies the consideration to be the grant of credit accommodation to Chemark in the sum of P20 M. Also what is posed is a legal issue resolvable in light of the character of Dynetics as a joint and solidary debtor. Dynetics also asseverates that it did not intend its Indemnity Agreement as collaterals for future Chemark loans. This is a clear pretense considering that again under its Indemnity Agreement, Dynetics clearly bound itself to pay whatever amount Chemark may be indebted to Security Bank "under and by virtue of the aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of aforesaid credit accommodation(s.)" There is nothing on record to substantiate the pretense of mistake of Dynetics. (Rollo, p. 121)

xxx xxx xxx

Then Dynetics argues that it has raised the issue of novation in light of the new loan contracts between Security Bank and Chemark. Again, the alleged new contracts are established facts and need not be the subject of trial. Upon their basis, the court can conclude whether there is novation of contract. (Rollo, P. 125)

The petitioners also assail the awards of penalty charges at 36% per annum and interest at 18% and 24% per annum respectively on the loans. They contend that the interests are excessive and are not sustained by the evidence because the rate of interest stipulated in the promissory notes is only 11 % per annum.

The lower courts based the computation of interests and penalty charges on the affidavit of Charis Marquez, Assistant Manager of the Corporate Banking Group of Security Bank & Trust Co. Marquez was the account officer who handled the account of Chemark. The pertinent portions of the affidavit read as follows:

22. As per statements of Accounts dated June l5, 1985, under the said promissory notes (Annexes "2" and "3" hereof) covered by the subject Indemnity Agreements (Annexes "4", "7" and "8" hereof), the total outstanding obligation of Dynetics, Inc., Matrix Management & Trading Corporation and Antonio M. Garcia to Security Bank & Trust Co. was P38,189,038.27, including interest and charges. Attached hereto as Annexes "9" and "l0" are copies of said Statements of Accounts dated June 15, 1985;

23. In the said Statements of Accounts dated June 15, 1985, we charged 18% and 25% per annum, respectively, because the subject loans (Annexes "2" and "3" hereof) were intended to be rediscounted at the Central Bank at 11% per annum. However, when Chemark Electric Motors, Inc. failed to give us the required letter of credit which was a requirement of the Central Bank, we charged them 18% and 24% instead of 11% interest per annum. These higher interest charges were based on and authorized under our Credit Proposal, copies of which are hereto attached as Annexes "11" to "11-B". (Original Records, p. 252)

The increased interest rates are expressly provided for in the amended credit line agreement and in the two promissory notes executed by Chemark in favor of Security Bank & Trust Co. We find no reversible error in the award of interests.

The penalty of 36% per annum is provided in the promissory notes (Annexes "3", "4" Affidavit), as follows:

If this note is not fully paid when due, the undersigned shall pay, in addition to the stipulated interest, a penalty of 3% per month on the total outstanding principal and interest due and unpaid. ... (Original Records, p. 256)

The affidavit and supporting documents were attached to the respondent bank's motion for summary judgment. The petitioners failed to oppose Marquez' affidavit in their "Oppositions" to the motion for summary judgment. Neither did they submit counter- affidavits, as was their right, to oppose these amounts due from them including the increased interests and penalty charges. Under these circumstances, the respondent bank was entitled to summary judgment (Philippine National Bank v. Phil. Leather Co., Inc., et al. 105 Phil. 400; See also Mercado, et al. v. Court of Appeals supra).<äre||anº•1àw> As earlier stated, the lower court committed no reversible error in awarding the questioned interests. We cannot, however, agree with the appellate court as regards the award of penalty charges at 36% per annum.

Penalty interests are in the nature of liquidated damages (Cumagun v. Philippine American Insurance Co., Inc., et al. G.R. No. 81453 August 15, 1988; Lambert v. Fox, 26 Phil. 588) and may be equitably reduced by the courts if they are iniquitous or unconscionable. (See Articles 1229, 2227, New Civil Code).

The records show that on the first loan, the principal of which is P6,350,750.00, the penalty charges as of June 15, 1986 are already equivalent to P6,774,378.06 (p. 265, Original Records) and that on the second loan, the principal of which is P8,649,250.00 the penalty charges as of June 15, 1985 are equivalent to P8,662,008.53. (p. 266, Original Records) The P6,774,378.06 penalty charges in the first loan would have been earned by the private respondent after only 725 days (1 year and 360 days) of delay in the payment of the loan while the P8,662,008.53 penalty charges would have been earned by the private respondent after only 646 days (1 year and 281 days) of delay in the payment of the loan. The figures from 1985 to 1988 would amount to several times the principal loans.

We agree with the petitioner that the penalty charges are excessive and unconscionable. The interest charges are enough punishment for the petitioners' failure to comply with their obligations.

Finally, the petitioners question the amount for attorney's fees equivalent to 10% of their obligation.

Again, Chemark's promissory notes provide for the award of attorney's fees in case of default to pay the loans, to wit:

xxx xxx xxx

If this note is not fully paid when due, the undersigned shall pay, in addition to the stipulated interest, a penalty of 3% per month on the total outstanding principal and interest due and unpaid. The undersigned shall also pay, as and for attorney's fee, a sum equivalent to 20% of the total amount due under this note plus expenses and costs of collection, in case this note is placed in the hands of an attorney for collection. (See Annexes "2", "3", Affidavit of Charis Marquez) (Original Records, p. 255)

The award for attorney's fees is justified and, in fact, is even lower than that agreed upon by the parties.