J.A.B. Bulao & Associates

BELLE CORPORATION VS.  COMMISSIONER OF INTERNAL REVENUE (G.R. No. 181298, 10 JANUARY 2011,  DEL CASTILLO, J.) SUBJECT: REFUND OF EXCESS INCOME TAX PAYMENTS. BRIEF TITLE: BELL CORP VS. CIR

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D E C I S I O N

DEL CASTILLO, J.:

Section 69 of the old National Internal Revenue Code (NIRC) allows unutilized tax credits to be refunded as long as the claim is filed within the prescriptive period.  This, however, no longer holds true under Section 76 of the 1997 NIRC as the option to carry-over excess income tax payments to the succeeding taxable year is now irrevocable.

This Petition for Review on Certiorari^[1][1] under Rule 45 of the Rules of Court seeks to set aside the January 25, 2007 Decision^[2][2] and the January 21, 2008 Resolution^[3][3] of the Court of Appeals (CA).

Factual Antecedents

Petitioner Belle Corporation is a domestic corporation engaged in the real estate and property business.^[4][4] 

On May 30, 1997, petitioner filed with the Bureau of Internal Revenue (BIR) its Income Tax Return (ITR) for the first quarter of 1997, showing a gross income of P741,607,495.00, a deduction of P65,381,054.00, a net taxable income of P676,226,441.00 and an income tax due of P236,679,254.00, which petitioner paid on even date through PCI Bank, Tektite Tower Branch, an Authorized Agent Bank of the BIR.^[5][5]

On August 14, 1997, petitioner filed with the BIR its second quarter ITR, declaring an overpayment of income taxes in the amount of P66,634,290.00.  The computation of which is reproduced below:

In view of the overpayment, no taxes were paid for the second and third quarters of 1997.^[7][7]  Petitioner’s ITR for the taxable year ending December 31, 1997 thereby reflected an overpayment of income taxes in the amount of P132,043,528.00, computed as follows:

Instead of claiming the amount as a tax refund, petitioner decided to apply it as a tax credit to the succeeding taxable year by marking the tax credit option box in its 1997 ITR.^[9][9]

For the taxable year 1998, petitioner’s amended ITR showed an overpayment of P106,447,318.00, computed as follows:

Gross Income                                                                                        P  1,279,810,489.00

Less: Deduction                                                                         1,346,553,546.00

Taxable Income (Loss)                                                                        (P     66,743,057.00)

Tax Rate                                                                                                                          34%

Tax Due (Regular Income Tax)                                   –                                      NIL

Minimum Corporate Income Tax                                       P       25,596,210.00

Tax Due                                                                                          25,596,210.00

Less: Tax Credits/Payments

                   (a) Prior year’s excess Tax Credits                                  (P   132,041,528.00)

                   (b) Quarterly payment                                               –

                   (c) Creditable tax withheld                         –                                                                                  

Tax Payable/Overpayment                                                  (P   106,447,318.00)^[10][10] 

On April 12, 2000, petitioner filed with the BIR an administrative claim for refund of its unutilized excess income tax payments for the taxable year 1997 in the amount of P106,447,318.00.^[11][11]

Notwithstanding the filing of the administrative claim for refund, petitioner carried over the amount of P106,447,318.00 to the taxable year 1999 and applied a portion thereof to its 1999 Minimum Corporate Income Tax (MCIT) liability, as evidenced by its 1999 ITR.^[12][12]  Thus:

Gross Income                                                                                            P  708,888,638.00

Less: Deduction                                                                           1,328,101,776.00

Taxable Income                                                                       (P  619,213,138.00)

Tax Due                                                                                                            –                  

Minimum Corporate Income Tax                                            P   14,185,874.00

Less: Tax Credits/Payments

   (a) Prior year’s excess Credit                            P 106,447,318.00

   (b) Tax Payments for the 1st & 3rd Qtrs.        0

   (c) Creditable tax withheld                                               0                     P  106,447,318.00

TAX PAYABLE/REFUNDABLE                                   (P   92,261,444.00)^[13][13]

Proceedings before the Court of Tax Appeals (CTA)

On April 14, 2000, due to the inaction of the respondent Commissioner of Internal Revenue (CIR) and in order to toll the running of the two-year prescriptive period, petitioner appealed its claim for refund of unutilized excess income tax payments for the taxable year 1997 in the amount of P106,447,318.00 with the CTA via a Petition for Review,^[14][14] docketed as CTA Case No. 6070.

In answer thereto, respondent interposed that:

4.     Petitioner’s alleged claim for refund/tax credit is subject to administrative routinary investigation/examination by respondent’s Bureau;

5.     Petitioner failed miserably to show that the total amount of P106,447,318.00 claimed as overpaid or excess income tax is refundable;

6.     Taxes paid and collected are presumed to have been paid in accordance with law; hence, not refundable;   

7.     In an action for tax refund, the burden is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund;

8.     It is incumbent upon petitioner to show that it has complied with the provisions of Section 204 (c) in relation to Section 229 of the tax Code;

9.     Well-established is the rule that refunds/tax credits are construed strictly against the taxpayer as they partake the nature of tax exemptions.^[15][15]

To prove entitlement to the refund, petitioner submitted, among others, the following documents: its ITR for the first quarter of taxable year 1997 (Exhibit “B”),^[16][16] its tentative ITRs for taxable years 1997 (Exhibit “D”)^[17][17] and 1998 (Exhibit “H”),^[18][18] its final ITRs for taxable years 1997 (Exhibit “E”),^[19][19] 1998 (Exhibit “I”)^[20][20] and 1999 (Exhibit “J”),^[21][21] its Letter Claim for Refund filed with the BIR (Exhibit “K”)^[22][22] and the Official Receipt issued by PCI Bank showing the income tax payment made by petitioner in the amount of P236,679,254.00  for the first quarter of 1997 (Exhibit “C”).^[23][23]

On April 10, 2001, the CTA rendered a Decision^[24][24] denying petitioner’s claim for refund.  It found:

[T]hat all the allegations made by the Petitioner as well as the figures accompanying Petitioner’s claim are substantiated by documentary evidence but noticed some flaws in Petitioner’s application of the pertinent laws involved.

It bears stressing that the applicable provision in the case at bar is Section 69 of the old Tax Code and not Section 76 of the 1997 Tax Code. Settled is the rule that under Section 69 of the old Tax Code, the carrying forward of any excess/overpaid income tax for a given taxable year is limited only up to the succeeding taxable year.

A painstaking scrutiny of Petitioner’s income tax returns would show that Petitioner carried over its 1997 refundable tax of P132,043,528.00 to the succeeding year of 1998 yielding an overpayment of P106,447,318.00 (Exhibit I-1) after deducting therefrom the minimum Corporate Income tax of P25,596,210.00.  However, Petitioner even went further to the taxable year 1999 and applied the Prior Year’s (1998) Excess Credit of P106,447,318.00 to its income tax liability.

True enough, upon verification of Petitioner’s 1999 Corporate Annual Income Tax Return (Exh. I), this Court found that the whole amount of P106,447,318.00 representing its prior year’s excess credit (subject of this claim) was carried forward to its 1999 income tax liability, details of the 1999 Income Tax Return are shown below as follows:

Gross Income                                                                                                 P     708,888,638.00

Less: Deduction                                                                                                 1,328,101,776.00

Taxable Income                                                                                            (P     619,213,138.00)

Tax Due                                                                                                                            –                   

Minimum Corporate Income Tax                                                                 P       14,185,874.00

Less: Tax Credits/Payments

   (a) Prior year’s excess Credit                                 P  106,447,318.00

   (b) Tax Payments for the 1st & 3rd Qtrs.                             0

   (c) Creditable tax withheld                                                      0                 P   106,447,318.00

TAX PAYABLE/REFUNDABLE                                                         (P     92,261,444.00)

It is an elementary rule in taxation that an automatic carry over of an excess income tax payment should only be made for the succeeding year. (Paseo Realty and Dev’t. Corp. vs. CIR, CTA Case No. 4528, April 30, 1993) True enough, implicit from the provisions of Section 69 of the NIRC, as amended, (supra) is the fact that the refundable amount may be credited against the income tax liabilities for the taxable quarters of the succeeding taxable year not succeeding years; and that the carry-over is only limited to the quarters of the succeeding taxable year. (citing ANSCOR Hagedorn Securities Inc. vs. CIR, CA-GR SP 38177, December 21, 1999) To allow the application of excess taxes paid for two successive years would run counter to the specific provision of the law above-mentioned.^[25][25]   (Emphasis supplied.)

Petitioner sought reconsideration^[26][26] of the CTA’s denial of its claim for refund, but the same was denied in a Resolution^[27][27] dated June 5, 2001, prompting petitioner to elevate the matter to the CA via a Petition for Review^[28][28] under Rule 43 of the Rules of Court.

Ruling of the Court of Appeals

On January 25, 2007, the CA, applying Philippine Bank of Communications v. Commissioner of Internal Revenue,^[29][29] denied the petition.  The CA explained that the overpayment for taxable year 1997 can no longer be carried over to taxable year 1999 because excess income payments can only be credited against the income tax liabilities of the succeeding taxable year, in this case up to 1998 only and not beyond.^[30][30]  Neither can the overpayment be refunded as the remedies of automatic tax crediting and tax refund are alternative remedies.^[31][31]  Thus, the CA ruled:

[W]hile BELLE may not have fully enjoyed the complete utilization of its option and the sum of Php106,447,318 still remained after it opted for a tax carry over of its excess payment for the taxable year 1998, but be that as it may, BELLE has only itself to blame for making such useless and damaging option, and BELLE may no longer opt to claim for a refund considering that the remedy of refund is barred after the corporation has previously opted for the tax carry over remedy. As a matter of fact, the CTA even made the factual findings that BELLE committed an aberration to exhaust its unutilized overpaid income tax by carrying it over further to the taxable year 1999, which is a blatant transgression of the “succeeding taxable year limit” provided for under Section 69 of the old NIRC.^[32][32]  (Emphasis supplied)

Hence, the fallo of the Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is DENIED, and accordingly, the herein impugned April 10, 2001 Decision and June 5, 2001 Resolution of the CTA are hereby affirmed.

SO ORDERED.^[33][33]

Petitioner moved for reconsideration.^[34][34]  The CA, however, denied the same in a Resolution^[35][35] dated January 21, 2008.

Issues

Aggrieved, petitioner availed of the present recourse, raising the following assignment of errors:

A.          THE CA COMMITTED SERIOUS ERROR OF LAW IN APPLYING THE PBCOM CASE.

        A.1.    THE [DECISION IN THE] PBCOM CASE HAS ALREADY BEEN REPEALED.

        A.2.    ASSUMING ARGUENDO THAT THE [DECISION IN THE] PBCOM CASE HAS NOT BEEN REPEALED, IT HAS NO APPLICATION TO BELLE.

B.    THE CA COMMITTED SERIOUS ERROR OF LAW IN FINDING THAT BELLE’S REFUND CLAIM IS NOT ON ALL FOURS WITH THE CASES OF BPI FAMILY AND AB LEASING.

B.1.     BELLE’S ‘CARRYING-OVER’ OF ITS EXCESS INCOME TAX PAID FOR 1997 TO 1999 (BEYOND THE SUBSEQUENT YEAR) IS IMMATERIAL.

B.2.     BELLE’S PARTIAL USE OF ITS EXCESS INCOME TAX PAID IN 1998 (THE SUBSEQUENT YEAR) DOES NOT PRECLUDE BELLE FROM ASKING FOR A REFUND.^[36][36]

In a nutshell, the issue boils down to whether petitioner is entitled to a refund of its excess income tax payments for the taxable year 1997 in the amount of P106,447,318.00.

Petitioner’s Arguments

Petitioner insists that it is entitled to a refund as the ruling in Philippine Bank of Communications v. Commissioner of Internal Revenue^[37][37] relied upon by the CA in denying its claim has been overturned by BPI-Family Savings Bank, Inc. v. Court of Appeals,^[38][38] AB Leasing and Finance Corporation v. Commissioner of Internal Revenue,^[39][39] Calamba Steel Center, Inc. v. Commissioner of Internal Revenue,^[40][40] and State Land Investment Corporation v. Commissioner of Internal Revenue.^[41][41]  In these cases, the taxpayers were allowed to claim refund of unutilized tax credits.^[42][42]  Similarly, in this case, petitioner asserts that it may still recover unutilized tax credits via a claim for refund.^[43][43] 

And while petitioner admits that it has committed a “blatant transgression” of the “succeeding taxable year limit” when it carried over its 1997 excess income tax payments beyond the taxable year 1998, petitioner believes that this should not result in the denial of its claim for refund but should only invalidate the application of its 1997 unutilized excess income tax payments to its 1999 income tax liabilities.^[44][44] Hence, petitioner postulates that a claim for refund of its unutilized tax credits for the taxable year 1997 may still be made because the carry-over thereof to the taxable year 1999 produced no legal effect, and is, therefore, immaterial to the resolution of its claim for refund.^[45][45]

Respondent’s Arguments

            Respondent, on the other hand, maintains that the cases of BPI-Family Savings Bank^[46][46] and AB Leasing^[47][47] are inapplicable as the facts obtaining therein are different from those of the present case.^[48][48]  What is controlling, therefore, is the ruling in Philippine Bank of Communications,^[49][49] that tax refund and tax credit are alternative remedies; thus, “the choice of one precludes the other.”^[50][50]  Respondent, therefore, submits that since petitioner has already applied its 1997 excess income tax payments to its liabilities for taxable year 1998, it is precluded from carrying over the same to taxable year 1999, or from filing a claim for refund.^[51][51]

Our Ruling

The petition has no merit.

Both the CTA and the CA erred in applying Section 69^[52][52] of the old NIRC.  The law applicable is Section 76 of the NIRC.

Unutilized excess income tax payments may be refunded within two years from the date of payment under Section 69 of the old NIRC

Under Section 69 of the old NIRC, in case of overpayment of income taxes, a corporation may either file a claim for refund or carry-over the excess payments to the succeeding taxable year.  Availment of one remedy, however, precludes the other.^[53][53] 

Although these remedies are mutually exclusive, we have in several cases allowed corporations, which have previously availed of the tax credit option, to file a claim for refund of their unutilized excess income tax payments.  

In BPI-Family Savings Bank,^[54][54] the bank availed of the tax credit option but since it suffered a net loss the succeeding year, the tax credit could not be applied; thus, the bank filed a claim for refund to recover its excess creditable taxes.  Brushing aside technicalities, we granted the claim for refund.

Likewise, in Calamba Steel Center, Inc.,^[55][55] we allowed the refund of excess income taxes paid in 1995 since these could not be credited to taxable year 1996 due to business losses.  In that case, we declared that “a tax refund may be claimed even beyond the taxable year following that in which the tax credit arises x x x provided that the claim for such a refund is made within two years after payment of said tax.”^[56][56]

In State Land Investment Corporation,^[57][57] we reiterated that “if the excess income taxes paid in a given taxable year have not been entirely used by a x x x corporation against its quarterly income tax liabilities for the next taxable year, the unused amount of the excess may still be refunded, provided that the claim for such a refund is made within two years after payment of the tax.”^[58][58] 

Thus, under Section 69 of the old NIRC, unutilized tax credits may be refunded as long as the claim is filed within the two-year prescriptive period.

The option to carry over excess income tax payments is irrevocable under Section 76 of the 1997 NIRC

This rule, however, no longer applies as Section 76 of the 1997 NIRC now reads:

Section 76.  Final Adjustment Return. – Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either:   

(a)  Pay the excess tax still due; or

(b)  Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor.   (Emphasis supplied)

Under the new law, in case of overpayment of income taxes, the remedies are still the same; and the availment of one remedy still precludes the other.  But unlike Section 69 of the old NIRC, the carry-over of excess income tax payments is no longer limited to the succeeding taxable year. Unutilized excess income tax payments may now be carried over to the succeeding taxable years until fully utilized.  In addition, the option to carry-over excess income tax payments is now irrevocable.  Hence, unutilized excess income tax payments may no longer be refunded.

In the instant case, both the CTA and the CA applied Section 69 of the old NIRC in denying the claim for refund.  We find, however, that the applicable provision should be Section 76 of the 1997 NIRC because at the time petitioner filed its 1997 final ITR, the old NIRC was no longer in force.  In Commissioner of Internal Revenue v. McGeorge Food Industries, Inc.,^[59][59] we explained that:

Section 76 and its companion provisions in Title II, Chapter XII should be applied following the general rule on the prospective application of laws such that they operate to govern the conduct of corporate taxpayers the moment the 1997 NIRC took effect on 1 January 1998. There is no quarrel that at the time respondent filed its final adjustment return for 1997 on 15 April 1998, the deadline under Section 77 (B) of the 1997 NIRC (formerly Section 70(b) of the 1977 NIRC), the 1997 NIRC was already in force, having gone into effect a few months earlier on 1 January 1998. Accordingly, Section 76 is controlling.

The lower courts grounded their contrary conclusion on the fact that respondent’s overpayment in 1997 was based on transactions occurring before 1 January 1998. This analysis suffers from the twin defects of missing the gist of the present controversy and misconceiving the nature and purpose of Section 76. None of respondent’s corporate transactions in 1997 is disputed here. Nor can it be argued that Section 76 determines the taxability of corporate transactions.  To sustain the rulings below is to subscribe to the untenable proposition that, had Congress in the 1997 NIRC moved the deadline for the filing of final adjustment returns from 15 April to 15 March of each year, taxpayers filing returns after 15 March 1998 can excuse their tardiness by invoking the 1977 NIRC because the transactions subject of the returns took place before 1 January 1998. A keener appreciation of the nature and purpose of the varied provisions of the 1997 NIRC cautions against sanctioning this reasoning.^[60][60]

Accordingly, since petitioner already carried over its 1997 excess income tax payments to the succeeding taxable year 1998, it may no longer file a claim for refund of unutilized tax credits for taxable year 1997.

To repeat, under the new law, once the option to carry-over excess income tax payments to the succeeding years has been made, it becomes irrevocable.  Thus, applications for refund of the unutilized excess income tax payments may no longer be allowed.

WHEREFORE, the petition is hereby DENIED.  The Decision dated January 25, 2007 and the Resolution dated January 21, 2008 of the Court of Appeals are hereby AFFIRMED only insofar as the denial of petitioner’s claim for refund is concerned.

            SO ORDERED.

MARIANO C. DEL CASTILLO 

Associate Justice 

WE CONCUR:

RENATO C. CORONA

Chief Justice

Chairperson

JOSE PORTUGAL PEREZ

Associate Justice

C E R T I F I C A T I O N

            Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA

Chief Justice

 RE:  LETTER-COMPLAINT OF ATTY. ARIEL SAMSON C. CAYETUNA, ET AL., ALL EMPLOYEES OF ASSOCIATE JUSTICE MICHAEL P. ELBINIAS AGAINST ASSOCIATE JUSTICE MICHAEL P. ELBINIAS, CA – MINDANAO STATION (A.M. OCA IPI NO. 08-127-CA-J, 11 JANUARY  2011, VELASCO, JR., J.) SUBJECT: ADMINISTRATIVE PROCEEDINGS AGAINST JUDGES. BRIEF TITLE: LETTER-COMPLAINT OF CAYETUNA.

x——————————————————————–x

R E S O L U T I O N

VELASCO, JR., J.:

The Case 

Complainants Attys. Ariel Samson C. Cayetuna, Cathy D. Cardino, Cynthia Y. Jamero, Grace L. Yulo, Ken Rinehart V. Sur, Roderick Roxas (driver), and Alfonso Abugho (utility worker) were confidential employees assigned in the Office of Associate Justice Michael P. Elbinias, Court of Appeals (CA) – Mindanao Station in Cagayan de Oro City, Misamis Oriental.  They filed with this Court an unverified letter-complaint^[1][1] dated April 30, 2008 charging Justice Elbinias with Gross Inefficiency; Bribe Solicitation; Drinking Liquor in Office Premises; Personal Use of Government Property and Resources; Falsification of a Favored Employee’s Daily Time Record; Disrespect Towards fellow Justices; Oppression through Intemperate, Oppressive and Threatening Language; and Grave Abuse of Authority. 

Complainants prayed for (1) the dismissal from service of Justice Elbinias; (2) his preventive suspension pending investigation of the instant administrative complaint; (3) the provision of “security” to them from his retaliation and reprisal on account of this complaint; and (4) the acceptance by the Court of their enclosed resignation letters^[2][2] without the prior approval of Justice Elbinias for fear that they would be peremptorily terminated by him instead.

Moreover, Atty. Cayetuna wrote then Chief Justice Reynato S. Puno a confidential letter^[3][3] dated April 30, 2008, narrating how he was instantly terminated by Justice Elbinias on April 24, 2008 due to his refusal to sign a letter-reply to a litigant, and asking for help in order to receive his salary for the second half of April 2008 and Representation and Transportation Allowance (RATA) for April 2008 which were not given to him when these emoluments were released to the CA employees in the CA – Mindanao Station on April 25, 2008 ostensibly because of his having been terminated the day before.  Likewise, on April 28, 2008, he was informed by the CA Cashier that he would no longer receive the Emergency Economic Assistance (EEA) and the midyear bonus on account of his termination.   

The Facts

The instant case precipitated from a letter-complaint, dated February 6, 2008, filed by a litigant (petitioner in CA-G.R. SP No. 01580, entitled Algabre v. RTC, Branch 15, Davao City, which was raffled to Justice Elbinias as ponente) before the Presidential Action Center (PAC) of the Office of the President requesting assistance for the resolution of the case which has been pending before the CA – Mindanao Station for almost a year since its filing on March 6, 2007.  The letter-complaint was referred by the PAC to Deputy Court Administrator (DCA) Reuben P. Dela Cruz, in-charge for Regions IX-XII, for appropriate action.

Consequently, on April 8, 2008, then DCA Jose P. Perez^[4][4] indorsed the letter-complaint to the CA – Mindanao Station for appropriate action.  On April 21, 2008, Justice Elbinias received a copy of said letter-complaint thru an Indorsement dated April 18, 2008 from CA Executive Justice Romulo V. Borja.

Justice Elbinias assigned Atty. Cayetuna to draft the letter-reply explaining what transpired with the case which had already been decided on February 28, 2008.  Justice Elbinias, however, asked Atty. Cayetuna to sign the letter-reply and he would simply note it.  This was not palatable to Atty. Cayetuna who balked at signing the letter-reply.  On April 24, 2008, he wrote^[5][5] Justice Elbinias explaining why he could not, in conscience, sign it.  This earned the ire of Justice Elbinias who peremptorily terminated Atty. Cayetuna’s employment with the CA through a letter^[6][6] dated April 24, 2008 to Ruby Jane B. Rivera, Personnel Officer of the CA – Mindanao Station. 

The very next day, or on April 25, 2008, when the RATA for the lawyers and the salaries of the CA employees in the CA – Mindanao Station were released, Atty. Cayetuna did not receive his salary for the second half of April 2008 and RATA for that month on account of his termination.  Likewise, he was informed on April 28, 2008 that he would no longer receive his EEA and midyear bonus.  These are the subjects of Atty. Cayetuna’s April 30, 2008 letter to then Chief Justice Puno.

The other complainants, in solidarity with Atty. Cayetuna, filed the instant unverified letter-complaint.

In the meantime, acting on the requested acceptance of their resignation letters, then CA Presiding Justice Conrado A. Vasquez, Jr. issued a recommendation^[7][7] on May 6, 2008 for the approval of the resignations of complainants to then Chief Justice Puno.  The resignations were duly approved on May 7, 2008.  The approved resignations, however, inadvertently excluded that of Atty. Cynthia Y. Jamero.  Thus, on May 8, 2008, CA Presiding Justice Vasquez, Jr. likewise recommended^[8][8] for approval Atty. Jamero’s resignation, which was approved on May 9, 2008.

On July 3, 2008, complainants sent another unverified letter-complaint^[9][9] dated June 18, 2008 thanking the Court for the speedy acceptance of their resignation letters.  Therein, they additionally alleged Justice Elbinias’ belligerent attitude when¾upon receipt on May 8, 2008 of the Court’s approval and acceptance of complainants’ resignation letters, which inadvertently excluded Atty. Jamero’s¾Justice Elbinias wrote a letter to the Personnel Officer of the CA – Mindanao Station terminating Atty. Jamero’s employment but antedating it May 7, 2008.  Moreover, complainants raised another grievance against Justice Elbinias who, allegedly under flimsy reasons, refused to sign their clearances.  Finally, they imputed malevolent intent on Justice Elbinias who allegedly—although not confirmed—gave a list of their names to then newly appointed CA Associate Justice Ayson in connection with the applications of some of them.  In fine, they reiterated their plea for the preventive suspension of Justice Elbinias pending resolution of the instant case to prevent him from using his position to further harass them.

In his Comment^[10][10] dated July 13, 2008, Justice Elbinias vehemently denied the charges.  While admitting telling complainants that he would fire them, he said this was on account of the poor, inefficient and sloppy draft work of the complainants-lawyers, and the unsatisfactory performance of complainants driver and utility worker.  He attributed the concerted efforts of complainants to preempt their dismissal by filing the instant complaint as also an attempt to put him in a bad light.  On the issue of the firing of Atty. Cayetuna allegedly on his refusal to sign the letter-reply to Mr. Algabre, Justice Elbinias asserted that the mention of CA Associate Justice Lim therein was factual as shown in Atty. Cayetuna’s drafts and did not put Justice Lim in a bad light.  Moreover, he maintained that he never forced Atty. Cayetuna to sign the letter-reply, but the latter “set him up” by raising such an issue and writing an “insincere” written objection about it.  And having lost confidence in Atty. Cayetuna, he had no option but to fire him.

Additionally, on September 15, 2008, after getting a copy of complainants’ June 18, 2008 letter-complaint, Justice Elbinias filed his Supplemental Comment.^[11][11]  Therein, he asserted the need to do an inventory of records and cases before he would sign their clearances, since complainants’ sudden abandonment of his office left it in disarray with records difficult to locate.  He maintained that he was reorganizing his office and the inventory was still not finished on June 18, 2008 when complainants wrote their additional letter-complaint.  He also accused complainants of collective theft for the loss of some documents from his chamber.

Meanwhile, on July 24, 2009, all the current employees assigned in the Office of Justice Elbinias in the CA – Mindanao Station sent the Court a letter^[12][12] of support for Justice Elbinias dated July 13, 2009.

Also, on account of Justice Elbinias’ transfer to the CA in Manila, the Young Men’s Christian Association (YMCA) of Misamis Oriental, Inc. issued Board Resolution No. 133-S-2009^[13][13] on August 7, 2009, expressing appreciation for Justice Elbinias’ integrity and dedication as a CA Associate Justice.  Similarly, the City Council of Cagayan de Oro City issued Resolution No. 9776-2009^[14][14] on August 18, 2009, commending Justice Elbinias for his integrity and dedication in serving the citizenry as Associate Justice of the CA.

On March 2, 2010, through a Resolution^[15][15] of even date, we required the parties to manifest whether they would submit the case for resolution based on the pleadings.

On March 22, 2010, Justice Elbinias filed his Manifestation^[16][16] to submit the instant case for resolution based on the basis of the pleadings.  Complainants, however, filed on April 15, 2010 a letter^[17][17] requesting for copies of the pleadings filed by Justice Elbinias, which was duly granted.^[18][18]

On June 4, 2010, complainants filed their Omnibus Reply and Manifestation,^[19][19] dated June 3, 2010, to Justice Elbinias’ comments and duly submitted the instant case for resolution based on the pleadings filed.  They argued that their unverified complaints were properly treated by the Court as anonymous complaints, since respondent justice admitted the material allegations therein relative to the DTR of Leofer Andoy, failure to timely act on cases with Temporary Restraining Order (TRO), the “undertakings” they submitted as per respondent’s instructions, non-signing of their clearances and deterring Justice Ayson from hiring some of them.  Moreover, they asserted that Atty. Cayetuna’s drafts could not have been stolen by the author thereof, and that they did not violate Republic Act No. (RA) 3019 in divulging confidential information to unauthorized persons as then Chief Justice Puno could not be considered an unauthorized person. 

Besides, complainants stressed, no liability under Articles 363 (planting of evidence), 364 (blemish reputation of another), 353 (public and malicious imputation of a crime, etc.) and 183 (perjury) of the Revised Penal Code can be attributed to them, since their letter-complaints were filed with utmost circumspection and confidentiality.  To debunk their alleged inefficiency and assert the contrary of respondent’s allegation that they preempted their inevitable termination by filing the instant complaints, they submitted their respective but similar performance ratings of “Very Satisfactory,” together with the comparative Judicial Data Statistics from the Information and Statistical Data Division of the CA, which tended to show that the output data on case disposition of Justice Elbinias did not substantially change before and after they resigned from his office.  They contended that all these prove that their alleged inefficiency had no factual basis.  Finally, they maintained that they had already contemplated resigning way before the incidents involving Atty. Cayetuna and Abugho happened because of, they reiterate, his demeaning and terrorizing actuations against them.

On July 16, 2010, Justice Elbinias filed his Rejoinder.^[20][20]  He assailed complainants’ Omnibus Reply and Manifestation for again being conveniently not under oath, concluding their allegations to be insincere and untruthful.  He countered and debunked the assertions and allegations of complainants.  He strongly posited that complainants misled or mischaracterized facts by falsely asserting his alleged admission of their allegations in his Comment and Supplemental Comment.

Our Ruling

After an assiduous study of the parties’ allegations and counter-allegations, with due consideration of the documents they submitted to bolster their respective positions, the Court is constrained to dismiss the instant case for being unsubstantiated.

Both the letter-complaints of April 30, 2008 and June 18, 2008 are unverified, while the June 3, 2010 Omnibus Reply and Manifestation of complainants is not under oath.  It must be noted that most of the complainants are lawyers, and are presumed and ought to know the formal requirement of verification for administrative complaints as stated under Section 1, Rule 140:

SECTION 1.  How instituted.¾Proceedings for the discipline of Judges of regular and special courts and Justices of the Court of Appeals and the Sandiganbayan may be instituted motu proprio by the Supreme Court or upon a verified complaint, supported by affidavits of persons who have personal knowledge of the facts alleged therein or by documents which may substantiate their allegations, or upon an anonymous complaint, supported by public records of indubitable integrity.  The complaint shall be in writing and shall state clearly and concisely the acts and omissions constituting violations of standards of conduct prescribed for Judges by law, the Rules of Court, or the Code of Judicial Conduct.  (Emphasis supplied.)

The above rule provides three ways by which administrative proceedings against judges may be instituted: (1) motu proprio by the Supreme Court; (2) upon verified complaint with affidavits of persons having personal knowledge of the facts alleged therein or by documents which may substantiate said allegations; or (3) upon an anonymous complaint supported by public records of indubitable integrity.^[21][21]

Indeed, complainants not only failed to execute a verified complaint but also never submitted their affidavits showing personal knowledge of the allegations embodied in their letter-complaints.  To cover this procedural deficiency, they assert that the Court properly recognized their letter-complaints as an anonymous complaint, relying on Sinsuat v. Hidalgo.^[22][22] 

In Sinsuat, the Court took cognizance of the unverified motion and subsequent letters of complainants submitted to the Office of the Court Administrator as an anonymous complaint, since therein respondent Judge Hidalgo admitted complainants’ material allegations and “the motion and letters sufficiently averred the specific acts upon which respondent’s alleged administrative liability was anchored.  And the averments are verifiable from the records of the trial court and the CA’s Decision.”^[23][23]  In short, the unverified complaint was properly considered as an anonymous complaint, since the material allegations were not only admitted by respondent judge but are also verifiable from public records of indubitable integrity, i.e., records of the trial court, as aptly found by the CA.

This is not the case in this instant.  Complainants’ reliance on Sinsuat is misplaced.  For one, even a passing perusal of the Comment and Supplemental Comment does not show respondent Justice Elbinias admitting the allegations in the letter-complaints. For another, the averments and material allegations of complainants are neither verifiable from public records of indubitable integrity nor supported or substantiated by other competent evidence submitted by complainants. 

The formal faux pas of complainants could have been remedied by the submission under oath of their subsequent pleadings, particularly the Omnibus Reply, where they traversed the points and defenses raised by respondent vis-à-vis their allegations.  And they could have appended thereto their respective affidavits attesting to their personal knowledge of the facts of their material allegations.  But, as it is, complainants chose not to place their Omnibus Reply under oath, much less submitted their affidavits.  Verily, after receiving copies of respondent’s Comment and Supplemental Comment, they had ample opportunity but chose not to correct the deficiencies of their complaints while submitting the instant case for resolution based on the pleadings filed sans their affidavits.

Complainants assert that Justice Elbinias admitted the material allegations in their letter-complaints, to wit:  (1) that, aware of Andoy’s absences in February 2008 which were not reflected in his (Andoy’s) Daily Time Record (DTR), Justice Elbinias nonetheless signed said DTR; (2) that respondent did not deny failing to timely act on the application for TRO in the cited cases in their complaint; (3) that respondent’s lawyers (complainants) submitted their “undertakings” as per his instructions; and (4) that he did not sign complainants’ clearances on account of office inventory of records and for lack of follow- up by complainants.

These assertions are belied by respondent’s comment and supplemental comment. 

Justice Elbinias denies being fully aware of Andoy’s absences when he signed the latter’s DTRs.  He points out that he was not aware whether Andoy filed leaves for his absences in December 2007, and whether Andoy declared or not his absences in February 2008, since he signs all the DTRs of his office staff which are submitted together.  Thus, he maintains that if Andoy did not mark as absent the days he was absent or whether he filed leaves for his absences, respondent charges it to inadvertence on his part for having signed Andoy’s DTRs which was done in good faith.  Indeed, without copies of the subject DTRs of Andoy as duly signed by respondent and the logbook of their office reflecting the time of the employees’ arrival and departure, we cannot ascribe any liability on respondent.

On his alleged failure to timely act on an application for a TRO, it bears stressing that Justice Elbinias, in his Comment, asserts what he calls an “undue interest and irregular involvement.”^[24][24]  While respondent does not deny the fact that no TRO was issued, such is not equivalent to an admission of wrongdoing.  Verily, the issuance of any provisional remedy, such as a TRO in the alleged case, is addressed to the sound discretion of the court upon certain conditions as provided by law that are amply shown by the applicant.  Consequently, undue delay or inaction on an application of a provisional remedy, like a TRO, cannot be imputed to the judge or court where there is no showing that the grant thereof is proper and well nigh dictated by an indubitable right of a party-applicant that needs protection.  Anent the allegation of undue delay in the resolution of motions for reconsideration, we agree with respondent that said allegation is general and lacks specificity.  Complainants merely made a general allegation of undue delay without particulars as to specific cases, the motions for reconsideration of which have been set for resolution after the adverse parties have filed their comments thereto and have not been resolved beyond the 90-day period.  On the alleged inaction on cases with TRO, complainants failed to show that the issuance of a TRO in a particular case is paramount to the provisional protection of a party’s right in esse.

The “undertakings” embodied in the application letters^[25][25] of complainant-Attys. Jamero, Sur, Cardino and Yulo submitted by Justice Elbinias in his Comment duly show the nature of confidential employees.  Complainants contend that these were accomplished and submitted by them upon the instructions of respondent.  We find it incredulous that the “undertakings” were made by complainant-lawyers at the behest of respondent.  It stands to reason that an applicant, among others, submits an application letter.  The application letters submitted by complainants to Justice Elbinias could not have been under the latter’s instruction and control.  Consequently, the application letters, without more, were certainly from complainants and could not have been under the direction of respondent.

The fact that Justice Elbinias did not sign the clearances of complainants is sufficiently explained in his Supplemental Comment that he was reorganizing his office and doing an inventory of the rollos of the cases assigned to him.  Besides, as aptly pointed out by respondent, complainants were not unduly prejudiced by his delay in signing their clearances for they were able to receive their benefits and were even rehired in the CA Mindanao – Station despite the lack of clearances, for such were not needed for their reemployment as shown by the letter^[26][26] of CA Presiding Justice Vasquez, Jr. to respondent dated September 5, 2008.

Even granting arguendo and considering the letter-complaints as anonymous complaints, still these cannot prosper as stated earlier because the averments and material allegations of complainants are neither verifiable from public records of indubitable integrity nor supported or substantiated by other competent evidence submitted by complainants. 

In Anonymous Complaint against Pershing T. Yared, Sheriff III, Municipal Trial Court in Cities, Canlaon City, this Court reiterated the rule pertaining to anonymous complaints, thus:

At the outset, the Court stresses that an anonymous complaints is always received with great caution, originating as it does from an unknown author.  However, a complaint of such sort does not always justify its outright dismissal for being baseless or unfounded for such complaint may be easily verified and may, without much difficulty, be substantiated and established by other competent evidence.^[27][27]  (Emphasis supplied.)

In the instant case, the charges of Gross Inefficiency; Bribe Solicitation; Drinking Liquor in Office Premises; Personal Use of Government Property and Resources; Falsification of a Favored Employee’s Daily Time Record; Disrespect Towards fellow Justices; Oppression through Intemperate, Oppressive and Threatening Language; and Grave Abuse of Authority are neither supported by public records nor substantiated by competent evidence.

Public records do not support any of the allegations.  The incident involving Engr. Rowell T. Magalang, Administrative Officer, Maintenance and Utility Unit of the CA Mindanao – Station merely shows a misunderstanding between respondent and the engineer concerned.^[28][28]  As regards those of complainants Roxas and Abugho relative to their unauthorized absence on March 19, 2008, it is embodied in the letter^[29][29] of even date by Justice Elbinias to the Personnel Officer of the CA Mindanao – Station, Ruby Jane B. Rivera, which evidently shows what it is.  Complainants allege the nastiness of respondent in marking absent Abugho and Roxas that day even if they were present, only on account of their going out of the office for a few minutes to buy food.  Respondent counters that both were absent and not around when he looked for them on March 19, 2008, as he would not have informed the CA Personnel Officer if it were not so.  Since the utility worker and the driver are expected to be at the office during office hours, then it is logical that if they were not around, then they could not be present.

It is well-settled that in administrative proceedings, the burden of proof that respondent committed the acts complained of rests on the complainant.^[30][30]  In the instant case, complainants have not shown, much less submitted, substantial evidence supporting their allegations.

Anent the untimely and peremptory termination of complainant Atty. Cayetuna, we find it to be a misunderstanding between respondent and his most senior lawyer which has been blown out of proportion. 

A cursory perusal of the drafts^[31][31] prepared by Atty. Cayetuna of the letter-reply to Algabre would readily show that the explanation is factual in nature and in no way pejorative to CA Associate Justice Lim.  Thus, there is really no basis for Atty. Cayetuna’s misgiving about signing said letter-reply.  And it is uncalled for Atty. Cayetuna to write a formal letter to respondent about his refusal to do so. 

It must be borne in mind that complainants, as primarily confidential employees, need the trust of their immediate superior, Justice Elbinias.  In Philippine Amusement and Gaming Corporation v. Angara,^[32][32] this Court reiterated the principle behind and the element of trust in the employment to a primarily confidential position.  We cited De los Santos vs. Mallare, thus:

Every appointment implies confidence, but much more than ordinary confidence is reposed in the occupant of a position that is primarily confidential.  The latter phrase denotes not only confidence in the aptitude of the appointee for the duties of the office but primarily close intimacy which insures freedom of intercourse without embarrassment or freedom from misgivings of betrayals of personal trust or confidential matters of state.^[33][33]

Moreover, it has been said that confidential employees work at the pleasure of the appointing authority.  Thus, there is no quibble that when the relation between respondent CA Associate Justice Elbinias and his lawyers has deteriorated to the extent that there is no longer intimacy between them that insures freedom of intercourse without embarrassment or freedom from misgivings of betrayals of personal trust or confidential matters of state, then the confidential employment is no longer tenable.  The right of respondent to change the confidential employees in his office cannot be disputed.

Even if the allegations have not been substantially proved, still it is incumbent for Justice Elbinias to reflect on how the conflict between him and his staff came about.  While we take notice of the letter of support from other employees in the CA Mindanao – Station, and the Resolutions from the YMCA and the City Council of Cagayan de Oro City commending him, we hope that Justice Elbinias learns from this experience to better and improve the management and supervision of his staff.

WHEREFORE, premises considered, the instant administrative complaint is hereby DISMISSED.

SO ORDERED.                    

                                                          PRESBITERO J. VELASCO, JR.

                                                                        Associate Justice

WE CONCUR:

RENATO C. CORONA

Chief Justice

   ANTONIO T. CARPIO                    CONCHITA CARPIO MORALES                             

          Associate Justice                                           Associate Justice

ANTONIO EDUARDO B. NACHURA    TERESITA J. LEONARDO-DE CASTRO

         Associate Justice                                           Associate Justice

                    ARTURO D. BRION                               DIOSDADO M. PERALTA

                         Associate Justice                                             Associate Justice

                LUCAS P. BERSAMIN                    MARIANO C. DEL CASTILLO

          Associate Justice                                           Associate Justice

     ROBERTO A. ABAD                         MARTIN S. VILLARAMA, JR.

          Associate Justice                                           Associate Justice

       JOSE PORTUGAL PEREZ                        JOSE CATRAL MENDOZA

          Associate Justice                                           Associate Justice

MARIA LOURDES P.A. SERENO

Associate Justice

 LUZON DEVELOPMENT BANK VS. ANGELES CATHERINE ENRIQUEZ (G.R. NO. 168646, 12 JANUARY 2011, DEL CASTILLO, J.); DELTA DEVELOPMENT AND MANAGEMENT SERVICES, INC. VS. ANGELES CATHERINE ENRIQUEZ and LUZON DEVELOPMENT BANK, (G.R. NO. 168666, 12  JANUARY 2011,  DEL CASTILLO, J.) SUBJECTS: MORTAGE, CONTRACT TO SELL, DACION EN PAGO, LOAN OBLIGATIONS. BRIEF TITLE: LUZON DEVELOPMENT BANK VS. ENRIQUEZ.

 X —————————————————————-X

DOCTRINES:

MORTGAGING PROPERTY TO THE BANK WITHOUT PRIOR HLURB CLREARANCE IS VOID

            As the HLURB Arbiter and Board of Commissioners both found, DELTA violated Section 18 of PD 957 in mortgaging the properties in Delta Homes I (including Lot 4) to the BANK without prior clearance from the HLURB.  This point need not be belabored since the parties have chosen not to appeal the administrative fine imposed on DELTA for violation of Section 18. 

This violation of Section 18 renders the mortgage executed by DELTA void.  We have held before that “a mortgage contract executed in breach of Section 18 of [PD 957] is null and void.”^[1][61]  Considering that “PD 957 aims to protect innocent subdivision lot and condominium unit buyers against fraudulent real estate practices,” we have construed Section 18 thereof as “prohibitory and acts committed contrary to it are void.”^[2][62] 

CONTRACT TO SELL DOES NOT CONVEY OWNERSHIP. COURT OF APPEALS INVALIDATED DACION IN PAYMENT IN CONNECTION WITH A VOID MORTGAGE ON THE GROUND THAT MORTGAGE SHOULD NOT HAVE TAKEN PLACE BECAUSE THE OWNER HAS ALREADY CONVEYED THE PROPERTY TO ENRIQUEZ BY WAY OF CONTRACT TO SELL. THIS IS ERROR.

Because of the nullity of the mortgage, neither DELTA nor the BANK could assert any right arising therefrom.  The BANK’s loan of P8 million to DELTA has effectively become unsecured due to the nullity of the mortgage.  The said loan, however, was eventually settled by the two contracting parties via a dation in payment.  In the appealed Decision, the CA invalidated this dation in payment on the ground that DELTA, by previously entering into a Contract to Sell, had already conveyed its ownership over Lot 4 to Enriquez and could no longer convey the same to the BANK.  This is error, prescinding from a wrong understanding of the nature of a contract to sell.

Contract to sell does not transfer ownership

            Both parties are correct in arguing that the Contract to Sell executed by DELTA in favor of Enriquez did not transfer ownership over Lot 4 to Enriquez.  A contract to sell is one where the prospective seller reserves the transfer of title to the prospective buyer until the happening of an event, such as full payment of the purchase price.  What the seller obliges himself to do is to sell the subject property only when the entire amount of the purchase price has already been delivered to him.  “In other words, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the prospective buyer.”^[3][63]  It does not, by itself, transfer ownership to the buyer.^[4][64]

            In the instant case, there is nothing in the provisions of the contract entered into by DELTA and Enriquez that would exempt it from the general definition of a contract to sell.  The terms thereof provide for the reservation of DELTA’s ownership until full payment of the purchase price; such that DELTA even reserved the right to unilaterally void the contract should Enriquez fail to pay three successive monthly amortizations.

            Since the Contract to Sell did not transfer ownership of Lot 4 to Enriquez, said ownership remained with DELTA.  DELTA could then validly transfer such ownership (as it did) to another person (the BANK).  However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquez’s rights thereunder.  This is because the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957.  One of the protections afforded by PD 957 to buyers such as Enriquez is the right to have her contract to sell registered with the Register of Deeds in order to make it binding on third parties.  Thus, Section 17 of PD 957 provides:

Section 17.  Registration.  All contracts to sell, deeds of sale, and other similar instruments relative to the sale or conveyance of the subdivision lots and condominium units, whether or not the purchase price is paid in full, shall be registered by the seller in the Office of the Register of Deeds of the province or city where the property is situated.

x x x x (Emphasis supplied.)

The purpose of registration is to protect the buyers from any future unscrupulous transactions involving the object of the sale or contract to sell, whether the purchase price therefor has been fully paid or not.  Registration of the sale or contract to sell makes it binding on third parties; it serves as a notice to the whole world that the property is subject to the prior right of the buyer of the property (under a contract to sell or an absolute sale), and anyone who wishes to deal with the said property will be held bound by such prior right.

DELTA FAILED TO REGISTER THE CONTRACT TO SELL WITH THE REGISTER OF DEEDS. IS THE BANK STILL BOUND TO RESPECT THE CONTRACT TO SELL? YES. THE BANK KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY AND RISK THAT THE ASSIGNED PROPERTIES WERE ALREADY COVERED BY EXISTING CONTRACTS TO SELL IN FAVOR OF SUBDIVISION LOT BUYERS.

            While DELTA, in the instant case, failed to register Enriquez’s Contract to Sell with the Register of Deeds, this failure will not prejudice Enriquez or relieve the BANK from its obligation to respect Enriquez’s Contract to Sell.  Despite the non-registration, the BANK cannot be considered, under the circumstances, an innocent purchaser for value of  Lot 4 when it accepted the latter (together with other assigned properties) as payment for DELTA’s obligation.  The BANK was well aware that the assigned properties, including Lot 4, were subdivision lots and therefore within the purview of PD 957.  It knew that the loaned amounts were to be used for the development of DELTA’s subdivision project, for this was indicated in the corresponding promissory notes.  The technical description of Lot 4 indicates its location, which can easily be determined as included within the subdivision development.  Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned properties were already covered by existing contracts to sell in favor of subdivision lot buyers.  As observed by the Court in another case involving a bank regarding a subdivision lot that was already subject of a contract to sell with a third party:

[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whether any part of the property was already intended to be the subject of any other contract involving buyers or potential buyers. In granting the loan, [the Bank] should not have been content merely with a clean title, considering the presence of circumstances indicating the need for a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be deemed to be an innocent mortgagee.  x x x^[5][65]

Further, as an entity engaged in the banking business, the BANK is required to observe more care and prudence when dealing with registered properties.  The Court cannot accept that the BANK was unaware of the Contract to Sell existing in favor of Enriquez.  In Keppel Bank Philippines, Inc. v. Adao,^[6][66] we held that a bank dealing with a property that is already subject of a contract to sell and is protected by the provisions of PD 957, is bound by the contract to sell (even if the contract to sell in that case was not registered).  In the Court’s words:

It is true that persons dealing with registered property can rely solely on the certificate of title and need not go beyond it.  However, x x x, this rule does not apply to banks.  Banks are required to exercise more care and prudence than private individuals in dealing even with registered properties for their business is affected with public interest.  As master of its business, petitioner should have sent its representatives to check the assigned properties before signing the compromise agreement and it would have discovered that respondent was already occupying one of the condominium units and that a contract to sell existed between [the vendee] and [the developer].  In our view, petitioner was not a purchaser in good faith and we are constrained to rule that petitioner is bound by the contract to sell.^[7][67]

Bound by the terms of the Contract to Sell, the BANK is obliged to respect the same and honor the payments already made by Enriquez for the purchase price of Lot 4.  Thus, the BANK can only collect the balance of the purchase price from Enriquez and has the obligation, upon full payment, to deliver to Enriquez a clean title over the subject property.^[8][68] 

THE BANK ARGUES THAT SINCE LOT 4 IS ORDERED DELIVERED TO ENRIQUEZ, THEN DELTA STILL OWES TO THE EXTENT OF THE VALUE OF LOT 4. AND THUS THE DACION EN PAGO ENTERED WITH DELTA DID NOT EXTINGUISH THE OBLIGATION OF DELTA. THE ARGUMENT IS WITHOUT MERIT. THE DACION EN PAGO CLEARLY INTENDS THAT THE OBLIGATION TO THE BANK IS EXTINGUISHED BY THE ASSIGNMENT OF PROPERTIES. THE BANK TOOK THE RISK WITH REGARDS TO THOSE PROPERTIES THAT WERE COVERED BY CONTRACTS TO SELL.

Dacion en pago extinguished the loan obligation

            The BANK then posits that, if title to Lot 4 is ordered delivered to Enriquez, DELTA has the obligation to pay the BANK the corresponding value of Lot 4.  According to the BANK, the dation in payment extinguished the loan only to the extent of the value of the thing delivered.  Since Lot 4 would have no value to the BANK if it will be delivered to Enriquez, DELTA would remain indebted to that extent.

We are not persuaded.  Like in all contracts, the intention of the parties to the dation in payment is paramount and controlling.  The contractual intention determines whether the property subject of the dation will be considered as the full equivalent of the debt and will therefore serve as full satisfaction for the debt.  “The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished.”^[9][69] 

            In the case at bar, the Dacion en Pago executed by DELTA and the BANK indicates a clear intention by the parties that the assigned properties would serve as full payment for DELTA’s entire obligation:

KNOW ALL MEN BY THESE PRESENTS:

                This instrument, made and executed by and between:

x x x x

                THAT, the ASSIGNOR acknowledges to be justly indebted to the ASSIGNEE in the sum of ELEVEN MILLION EIGHT HUNDRED SEVENTY-EIGHT THOUSAND EIGHT HUNDRED PESOS (P11,878,800.00), Philippine Currency as of August 25, 1998.  Therefore, by virtue of this instrument, ASSIGNOR hereby ASSIGNS, TRANSFERS, and CONVEYS AND SETS OVER [TO] the ASSIGNEE that real estate with the building and improvements existing thereon, more particularly described as follows:

x x x x

of which the ASSIGNOR is the registered owner being evidenced by TCT No. x x x issued by the Registry of Deeds of Trece Martires City.

THAT, the ASSIGNEE does hereby accept this ASSIGNMENT IN PAYMENT OF THE TOTAL OBLIGATION owing to him by the ASSIGNOR as above-stated;^[10][70]

Without any reservation or condition, the Dacion stated that the assigned properties served as full payment of DELTA’s “total obligation” to the BANK.  The BANK accepted said properties as equivalent of the loaned amount and as full satisfaction of DELTA’s debt.  The BANK cannot complain if, as it turned out, some of those assigned properties (such as Lot 4) are covered by existing contracts to sell. As noted earlier, the BANK knew that the assigned properties were subdivision lots and covered by PD 957.  It was aware of the nature of DELTA’s business, of the location of the assigned properties within DELTA’s subdivision development, and the possibility that some of the properties may be subjects of existing contracts to sell which enjoy protection under PD 957.  Banks dealing with subdivision properties are expected to conduct a thorough due diligence review to discover the status of the properties they deal with.  It may thus be said that the BANK, in accepting the assigned properties as full payment of DELTA’s “total obligation,” has assumed the risk that some of the assigned properties (such as Lot 4) are covered by contracts to sell which it is bound to honor under PD 957. 

            A dacion en pago is governed by the law of sales.^[11][71]  Contracts of sale come with warranties, either express (if explicitly stipulated by the parties) or implied (under Article 1547 et seq. of the Civil Code).  In this case, however, the BANK does not even point to any breach of warranty by DELTA in connection with the Dation in Payment.  To be sure, the Dation in Payment has no express warranties relating to existing contracts to sell over the assigned properties.  As to the implied warranty in case of eviction, it is waivable^[12][72] and cannot be invoked if the buyer knew of the risks or danger of eviction and assumed its consequences.^[13][73]  As we have noted earlier, the BANK, in accepting the assigned properties as full payment of DELTA’s “total obligation,” has assumed the risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957. 

CAN ENRIQUEZ CALIM EXEMPLARY DAMAGES AND ATTORNEY’S FEES? NO.

Award of damages

            There is nothing on record that warrants the award of exemplary damages^[14][74] as well as attorney’s fees^[15][75] in favor of the BANK.

Balance to be paid by Enriquez

As already mentioned, the Contract to Sell in favor of Enriquez must be respected by the BANK.  Upon Enriquez’s full payment of the balance of the purchase price, the BANK is bound to deliver the title over Lot 4 to her.  As to the amount of the balance which Enriquez must pay, we adopt the OP’s ruling thereon which sustained the amount stipulated in the Contract to Sell.  We will not review Enriquez’s initial claims about the supposed violation of the price ceiling in BP 220, since this issue was no longer pursued by the parties, not even by Enriquez, who chose not to file the required pleadings^[16][76] before the Court.  The parties were informed in the Court’s September 5, 2007 Resolution that issues that are not included in their memoranda shall be deemed waived or abandoned.  Since Enriquez did not file a memorandum in either petition, she is deemed to have waived the said issue.

x – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – x

D E C I S I O N

DEL CASTILLO,  J.: 

            The protection afforded to a subdivision lot buyer under Presidential Decree (PD) No. 957 or The Subdivision and Condominium Buyer’s Protective Decree  will not be defeated by someone who is not an innocent purchaser for value.  The lofty aspirations of PD 957 should be read in every provision of the statute, in every contract that undermines its objects, in every transaction which threatens its fruition.  “For a statute derives its vitality from the purpose for which it is enacted and to construe it in a manner that disregards or defeats such purpose is to nullify or destroy the law.”^[1][1]

            These cases involve the separate appeals of Luzon Development Bank^[2][2]  (BANK) and Delta Development and Management Services, Inc.^[3][3] (DELTA) from the November 30, 2004 Decision of the Court of Appeals (CA), as well as its June 22, 2005 Resolution in CA-G.R. SP No. 81280.  The dispositive portion of the assailed Decision reads:

WHEREFORE, premises considered, the Decision dated June 17, 2003 and  Resolution dated November 24, 2003 are AFFIRMED with [m]odification in so far as Delta Development and Management Services, Inc. is liable and directed to pay petitioner Luzon Development Bank the value of the subject lot subject matter of the Contract to Sell between Delta Development and Management Services, Inc. and the private respondent [Catherine Angeles Enriquez].

SO ORDERED.^[4][4]

Factual Antecedents

            The BANK is a domestic financial corporation that extends loans to subdivision developers/owners.^[5][5]

            Petitioner DELTA is a domestic corporation engaged in the business of developing and selling real estate properties, particularly Delta Homes I in Cavite.  DELTA is owned by Ricardo De Leon (De Leon),^[6][6] who is the registered owner of a parcel of land covered by Transfer Certificate of Title (TCT) No. T-637183^[7][7] of the Registry of Deeds of the Province of Cavite, which corresponds to Lot 4 of Delta Homes I.  Said Lot 4 is the subject matter of these cases.

            On July 3, 1995, De Leon and his spouse obtained a P4 million loan from the BANK for the express purpose of developing Delta Homes I.^[8][8]  To secure the loan, the spouses De Leon executed in favor of the BANK a real estate mortgage (REM) on several of their properties,^[9][9] including Lot 4.  Subsequently, this REM was amended^[10][10] by increasing the amount of the secured loan from P4 million to P8 million.  Both the REM and the amendment were annotated on TCT No. T-637183.^[11][11]

            DELTA then obtained a Certificate of Registration^[12][12] and a License to Sell^[13][13] from the Housing and Land Use Regulatory Board (HLURB). 

            Sometime in 1997, DELTA executed a Contract to Sell with respondent Angeles Catherine Enriquez (Enriquez)^[14][14] over the house and lot in Lot 4 for the purchase price of P614,950.00.  Enriquez made a downpayment of P114,950.00.  The Contract to Sell contained the following provisions:

                That the vendee/s offered to buy and the Owner agreed to sell the above-described property subject to the following terms and conditions to wit:

                x x x x

                6.  That the (sic) warning shall be served upon the Vendee/s for failure to pay x x x Provided, however, that for failure to pay three (3) successive monthly installment payments, the Owner may consider this Contract to Sell null and void ab initio without further proceedings or court action and all payments shall be forfeited in favor of the Owner as liquidated damages and expenses for documentations. x x x

                That upon full payment of the total consideration if payable in cash, the Owner shall execute a final deed of sale in favor of the Vendee/s.  However, if the term of the contract is for a certain period of time, only upon full payment of the total consideration that a final deed of sale shall be executed by the Owner in favor of the Vendee/s.^[15][15]

            When DELTA defaulted on its loan obligation, the BANK, instead of foreclosing the REM, agreed to a dation in payment or a dacion en pago.  The Deed of Assignment in Payment of Debt was executed on September 30, 1998 and stated that DELTA “assigns, transfers, and conveys and sets over [to] the assignee that real estate with the building and improvements existing thereon x x x in payment of the total obligation owing to  [the Bank] x x x.”^[16][16]  Unknown to Enriquez, among the properties assigned to the BANK was the house and lot of Lot 4,^[17][17] which is the subject of her Contract to Sell with DELTA.  The records do not bear out and the parties are silent on whether the BANK was able to transfer title to its name.  It appears, however, that the dacion en pago was not annotated on the TCT of Lot 4.^[18][18]

            On November 18, 1999, Enriquez filed a complaint against DELTA and the BANK before the Region IV Office of the HLURB^[19][19] alleging that DELTA violated the terms of its License to Sell by: (a) selling the house and lots for a price exceeding that prescribed in Batas Pambansa (BP) Bilang 220;^[20][20] and (b) failing to get a clearance for the mortgage from the HLURB.  Enriquez sought a full refund of the P301,063.42 that she had already paid to DELTA, award of damages, and the imposition of administrative fines on DELTA and the BANK.

            In his June 1, 2000 Decision,^[21][21] HLURB Arbiter Atty. Raymundo A. Foronda upheld the validity of the purchase price, but ordered DELTA to accept payment of the balance of P108,013.36 from Enriquez, and (upon such payment)  to deliver to Enriquez the title to the house and lot free from liens and encumbrances.  The dispositive portion reads:

                WHEREFORE, premises considered, a decision is hereby rendered as follows:

1.  Ordering [DELTA] to accept complainant[’]s payments in the amount of P108,013.36 representing her balance based on the maximum selling price of P375,000.00;

2.  Upon full payment, ordering Delta to deliver the title in favor of the complainant free from any liens and encumbrances;

3.  Ordering [DELTA] to pay complainant the amount of P50,000.00 as and by way of moral damages;

4.  Ordering [DELTA] to pay complainant the amount of P50,000.00 as and by way of exemplary damages;

5.  Ordering [DELTA] to pay complainant P10,000.00 as costs of suit; and

6.  Respondent DELTA to pay administrative fine of P10,000.00^[[22][22]] for violation of Section 18 of P.D. 957^[[23][23]] and another P10,000.00 for violation of Section 22 of P.D. 957.^[[24][24]]

                SO ORDERED.^[25][25]

            DELTA appealed the arbiter’s Decision to the HLURB Board of Commissioners.^[26][26]  DELTA questioned the imposition of an administrative fine for its alleged violation of Section 18 of PD 957.  It argued that clearance was not required for mortgages that were constituted on a subdivision project prior to registration.   According to DELTA, it did not violate the terms of its license because it did not obtain a new mortgage over the subdivision project.  It likewise assailed the award of moral and exemplary damages to Enriquez on the ground that the latter has no cause of action.^[27][27]

Ruling of the Board of Commissioners (Board)^[28][28] 

            The Board held that all developers should obtain a clearance for mortgage from the HLURB, regardless of the date when the mortgage was secured, because the law does not distinguish. Having violated this legal requirement, DELTA was held liable to pay the administrative fine. 

            The Board upheld the validity of the contract to sell between DELTA and Enriquez despite the alleged violation of the price ceilings in BP 220.  The Board held that DELTA and Enriquez were presumed to have had a meeting of the minds on the object of the sale and the purchase price.  Absent any circumstance vitiating Enriquez’consent, she was presumed to have willingly and voluntarily agreed to the higher purchase price; hence, she was bound by the terms of the contract.

            The Board, however, deleted the arbiter’s award of damages to Enriquez on the ground that the latter was not free from liability herself, given that she was remiss in her monthly amortizations to DELTA. 

            The dispositive portion of the Board’s Decision reads:

            Wherefore, in view of the foregoing, the Office below’s decision dated June 01, 2000 is hereby modified to read as follows:

                1.  Ordering [Enriquez] to pay [DELTA] the amount due from the time she suspended payment up to filing of the complaint with 12% interest thereon per annum; thereafter the provisions of the Contract to Sell shall apply until full payment is made;

                2.  Ordering [DELTA] to pay an [a]dministrative [f]ine of P10,000.00 for violation of its license to sell and for violation of Section 18 of P.D. 957.

                So ordered.  Quezon City.^[29][29]

           Enriquez moved for a reconsideration of the Board’s Decision^[30][30] upholding the contractual purchase price.  She maintained that the price for Lot 4 should not exceed the price ceiling provided in BP 220.^[31][31] 

            Finding Enriquez’s arguments as having already been passed upon in the decision, the Board denied reconsideration.  The board, however, modified its decision, with respect to the period for the imposition of interest payments.  The Board’s resolution^[32][32] reads:

                WHEREFORE, premises considered, to [sic] directive No. 1 of the dispositive portion of the decision of our decision [sic] is MODIFIED as follows:

                1.  Ordering complainant to pay respondent DELTA the amount due from the time she suspended (sic) at 12% interest per annum, reckoned from finality of this decision[,] thereafter the provisions of the Contract to Sell shall apply until full payment is made.

                In all other respects, the decision is AFFIRMED.

                SO ORDERED.^[33][33]

            Both Enriquez and the BANK appealed to the Office of the President (OP).^[34][34]  The BANK disagreed with the ruling upholding Enriquez’s Contract to Sell; and insisted on its ownership over Lot 4.  It argued that it has become impossible for DELTA to comply with the terms of the contract to sell and to deliver Lot 4’s title to Enriquez given that DELTA had already relinquished all its rights to Lot 4 in favor of the BANK^[35][35] via the dation in payment. 

            Meanwhile, Enriquez insisted that the Board erred in not applying the ceiling price as prescribed in BP 220.^[36][36]

Ruling of the Office of the President^[37][37] 

       The OP adopted by reference the findings of fact and conclusions of law of the HLURB Decisions, which it affirmed in toto. 

           Enriquez filed a motion for reconsideration, insisting that she was entitled to a reduction of the purchase price, in order to conform to the provisions of BP 220.^[38][38]  The motion was denied for lack of merit.^[39][39] 

            Only the BANK appealed the OP’s Decision to the CA.^[40][40]  The BANK reiterated that DELTA can no longer deliver Lot 4 to Enriquez because DELTA had sold the same to the BANK by virtue of the dacion en pago.^[41][41]  As an alternative argument, in case the appellate court should find that DELTA retained ownership over Lot 4 and could convey the same to Enriquez, the BANK prayed that its REM over Lot 4 be respected such that DELTA would have to redeem it first before it could convey the same to Enriquez in accordance with Section 25^[42][42] of PD 957.^[43][43] 

            The BANK likewise sought an award of exemplary damages and attorney’s fees in its favor because of the baseless suit filed by Enriquez against it.^[44][44]

Ruling of the Court of Appeals^[45][45] 

            The CA ruled against the validity of the dacion en pago executed in favor of the BANK on the ground that DELTA had earlier relinquished its ownership over Lot 4 in favor of Enriquez via the Contract to Sell.^[46][46] 

            Since the dacion en pago is invalid with respect to Lot 4, the appellate court held that DELTA remained indebted to the BANK to the extent of Lot 4’s value.  Thus, the CA ordered DELTA to pay the corresponding value of Lot 4 to the BANK.^[47][47]

            The CA also rejected the BANK’s argument that, before DELTA can deliver the title to Lot 4 to Enriquez, DELTA should first redeem the mortgaged property from the BANK.  The CA held that the BANK does not have a first lien on Lot 4 because its real estate mortgage over the same had already been extinguished by the dacion en pago.  Without a mortgage, the BANK cannot require DELTA to redeem Lot 4 prior to delivery of title to Enriquez.^[48][48] 

            The CA denied the BANK’s prayer for the award of exemplary damages and attorney’s fees for lack of factual and legal basis.^[49][49]

            Both DELTA^[50][50] and the BANK^[51][51] moved for a reconsideration of the CA’s Decision, but both were denied.^[52][52]

            Hence, these separate petitions of the BANK and DELTA.

Petitioner Delta’s arguments^[53][53]

            DELTA assails the CA Decision for holding that DELTA conveyed its ownership over Lot 4 to Enriquez via the Contract to Sell.  DELTA points out that the Contract to Sell contained a condition that ownership shall only be transferred to Enriquez upon the latter’s full payment of the purchase price to DELTA.  Since Enriquez has yet to comply with this suspensive condition, ownership is retained by DELTA.^[54][54]  As the owner of Lot 4, DELTA had every right to enter into a dation in payment to extinguish its loan obligation to the BANK.  The BANK’s acceptance of the assignment, without any reservation or exception, resulted in the extinguishment of the entire loan obligation; hence, DELTA has no more obligation to pay the value of Enriquez’s house and lot to the BANK.^[55][55]

            DELTA prays for the reinstatement of the OP Decision.

The BANK’s arguments^[56][56]

            Echoing the argument of DELTA, the BANK argues that the Contract to Sell did not involve a conveyance of DELTA’s ownership over Lot 4 to Enriquez.  The Contract to Sell expressly provides that DELTA retained ownership over Lot 4 until Enriquez paid the full purchase price.  Since Enriquez has not yet made such full payment, DELTA retained ownership over Lot 4 and could validly convey the same to the BANK via dacion en pago.^[57][57] 

            Should the dacion en pago over Lot 4 be invalidated and the property ordered to be delivered to Enriquez, the BANK contends that DELTA should pay the corresponding value of Lot 4 to the BANK.  It maintains that the loan obligation extinguished by the dacion en pago only extends to the value of the properties delivered; if Lot 4 cannot be delivered to the BANK, then the loan obligation of DELTA remains to the extent of Lot 4’s value.^[58][58]

            The BANK prays to be declared the rightful owner of the subject house and lot and asks for an award of exemplary damages and attorney’s fees.

Enriquez’s waiver

            Enriquez did not file comments^[59][59] or memoranda in both cases; instead, she manifested that she will just await the outcome of the case.^[60][60]

Issues

            The following are the issues raised by the two petitions:

1.  Whether the Contract to Sell conveys ownership;

2.  Whether the dacion en pago extinguished the loan obligation, such that DELTA has no more obligations to the BANK;

3.  Whether the BANK is entitled to damages and attorney’s fees for being compelled to litigate; and

4.  What is the effect of Enriquez’s failure to appeal the OP’s Decision regarding her obligation to pay the balance on the purchase price.

Our Ruling

Mortgage contract void

            As the HLURB Arbiter and Board of Commissioners both found, DELTA violated Section 18 of PD 957 in mortgaging the properties in Delta Homes I (including Lot 4) to the BANK without prior clearance from the HLURB.  This point need not be belabored since the parties have chosen not to appeal the administrative fine imposed on DELTA for violation of Section 18. 

This violation of Section 18 renders the mortgage executed by DELTA void.  We have held before that “a mortgage contract executed in breach of Section 18 of [PD 957] is null and void.”^[61][61]  Considering that “PD 957 aims to protect innocent subdivision lot and condominium unit buyers against fraudulent real estate practices,” we have construed Section 18 thereof as “prohibitory and acts committed contrary to it are void.”^[62][62] 

Because of the nullity of the mortgage, neither DELTA nor the BANK could assert any right arising therefrom.  The BANK’s loan of P8 million to DELTA has effectively become unsecured due to the nullity of the mortgage.  The said loan, however, was eventually settled by the two contracting parties via a dation in payment.  In the appealed Decision, the CA invalidated this dation in payment on the ground that DELTA, by previously entering into a Contract to Sell, had already conveyed its ownership over Lot 4 to Enriquez and could no longer convey the same to the BANK.  This is error, prescinding from a wrong understanding of the nature of a contract to sell.

Contract to sell does not transfer ownership

            Both parties are correct in arguing that the Contract to Sell executed by DELTA in favor of Enriquez did not transfer ownership over Lot 4 to Enriquez.  A contract to sell is one where the prospective seller reserves the transfer of title to the prospective buyer until the happening of an event, such as full payment of the purchase price.  What the seller obliges himself to do is to sell the subject property only when the entire amount of the purchase price has already been delivered to him.  “In other words, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the prospective buyer.”^[63][63]  It does not, by itself, transfer ownership to the buyer.^[64][64]

            In the instant case, there is nothing in the provisions of the contract entered into by DELTA and Enriquez that would exempt it from the general definition of a contract to sell.  The terms thereof provide for the reservation of DELTA’s ownership until full payment of the purchase price; such that DELTA even reserved the right to unilaterally void the contract should Enriquez fail to pay three successive monthly amortizations.

            Since the Contract to Sell did not transfer ownership of Lot 4 to Enriquez, said ownership remained with DELTA.  DELTA could then validly transfer such ownership (as it did) to another person (the BANK).  However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquez’s rights thereunder.  This is because the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957.  One of the protections afforded by PD 957 to buyers such as Enriquez is the right to have her contract to sell registered with the Register of Deeds in order to make it binding on third parties.  Thus, Section 17 of PD 957 provides:

Section 17.  Registration.  All contracts to sell, deeds of sale, and other similar instruments relative to the sale or conveyance of the subdivision lots and condominium units, whether or not the purchase price is paid in full, shall be registered by the seller in the Office of the Register of Deeds of the province or city where the property is situated.

x x x x (Emphasis supplied.)

The purpose of registration is to protect the buyers from any future unscrupulous transactions involving the object of the sale or contract to sell, whether the purchase price therefor has been fully paid or not.  Registration of the sale or contract to sell makes it binding on third parties; it serves as a notice to the whole world that the property is subject to the prior right of the buyer of the property (under a contract to sell or an absolute sale), and anyone who wishes to deal with the said property will be held bound by such prior right.

            While DELTA, in the instant case, failed to register Enriquez’s Contract to Sell with the Register of Deeds, this failure will not prejudice Enriquez or relieve the BANK from its obligation to respect Enriquez’s Contract to Sell.  Despite the non-registration, the BANK cannot be considered, under the circumstances, an innocent purchaser for value of  Lot 4 when it accepted the latter (together with other assigned properties) as payment for DELTA’s obligation.  The BANK was well aware that the assigned properties, including Lot 4, were subdivision lots and therefore within the purview of PD 957.  It knew that the loaned amounts were to be used for the development of DELTA’s subdivision project, for this was indicated in the corresponding promissory notes.  The technical description of Lot 4 indicates its location, which can easily be determined as included within the subdivision development.  Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned properties were already covered by existing contracts to sell in favor of subdivision lot buyers.  As observed by the Court in another case involving a bank regarding a subdivision lot that was already subject of a contract to sell with a third party:

[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whether any part of the property was already intended to be the subject of any other contract involving buyers or potential buyers. In granting the loan, [the Bank] should not have been content merely with a clean title, considering the presence of circumstances indicating the need for a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be deemed to be an innocent mortgagee.  x x x^[65][65]

Further, as an entity engaged in the banking business, the BANK is required to observe more care and prudence when dealing with registered properties.  The Court cannot accept that the BANK was unaware of the Contract to Sell existing in favor of Enriquez.  In Keppel Bank Philippines, Inc. v. Adao,^[66][66] we held that a bank dealing with a property that is already subject of a contract to sell and is protected by the provisions of PD 957, is bound by the contract to sell (even if the contract to sell in that case was not registered).  In the Court’s words:

It is true that persons dealing with registered property can rely solely on the certificate of title and need not go beyond it.  However, x x x, this rule does not apply to banks.  Banks are required to exercise more care and prudence than private individuals in dealing even with registered properties for their business is affected with public interest.  As master of its business, petitioner should have sent its representatives to check the assigned properties before signing the compromise agreement and it would have discovered that respondent was already occupying one of the condominium units and that a contract to sell existed between [the vendee] and [the developer].  In our view, petitioner was not a purchaser in good faith and we are constrained to rule that petitioner is bound by the contract to sell.^[67][67]

Bound by the terms of the Contract to Sell, the BANK is obliged to respect the same and honor the payments already made by Enriquez for the purchase price of Lot 4.  Thus, the BANK can only collect the balance of the purchase price from Enriquez and has the obligation, upon full payment, to deliver to Enriquez a clean title over the subject property.^[68][68] 

Dacion en pago extinguished the loan obligation

            The BANK then posits that, if title to Lot 4 is ordered delivered to Enriquez, DELTA has the obligation to pay the BANK the corresponding value of Lot 4.  According to the BANK, the dation in payment extinguished the loan only to the extent of the value of the thing delivered.  Since Lot 4 would have no value to the BANK if it will be delivered to Enriquez, DELTA would remain indebted to that extent.

We are not persuaded.  Like in all contracts, the intention of the parties to the dation in payment is paramount and controlling.  The contractual intention determines whether the property subject of the dation will be considered as the full equivalent of the debt and will therefore serve as full satisfaction for the debt.  “The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished.”^[69][69] 

            In the case at bar, the Dacion en Pago executed by DELTA and the BANK indicates a clear intention by the parties that the assigned properties would serve as full payment for DELTA’s entire obligation:

KNOW ALL MEN BY THESE PRESENTS:

                This instrument, made and executed by and between:

x x x x

                THAT, the ASSIGNOR acknowledges to be justly indebted to the ASSIGNEE in the sum of ELEVEN MILLION EIGHT HUNDRED SEVENTY-EIGHT THOUSAND EIGHT HUNDRED PESOS (P11,878,800.00), Philippine Currency as of August 25, 1998.  Therefore, by virtue of this instrument, ASSIGNOR hereby ASSIGNS, TRANSFERS, and CONVEYS AND SETS OVER [TO] the ASSIGNEE that real estate with the building and improvements existing thereon, more particularly described as follows:

x x x x

of which the ASSIGNOR is the registered owner being evidenced by TCT No. x x x issued by the Registry of Deeds of Trece Martires City.

THAT, the ASSIGNEE does hereby accept this ASSIGNMENT IN PAYMENT OF THE TOTAL OBLIGATION owing to him by the ASSIGNOR as above-stated;^[70][70]

Without any reservation or condition, the Dacion stated that the assigned properties served as full payment of DELTA’s “total obligation” to the BANK.  The BANK accepted said properties as equivalent of the loaned amount and as full satisfaction of DELTA’s debt.  The BANK cannot complain if, as it turned out, some of those assigned properties (such as Lot 4) are covered by existing contracts to sell. As noted earlier, the BANK knew that the assigned properties were subdivision lots and covered by PD 957.  It was aware of the nature of DELTA’s business, of the location of the assigned properties within DELTA’s subdivision development, and the possibility that some of the properties may be subjects of existing contracts to sell which enjoy protection under PD 957.  Banks dealing with subdivision properties are expected to conduct a thorough due diligence review to discover the status of the properties they deal with.  It may thus be said that the BANK, in accepting the assigned properties as full payment of DELTA’s “total obligation,” has assumed the risk that some of the assigned properties (such as Lot 4) are covered by contracts to sell which it is bound to honor under PD 957. 

            A dacion en pago is governed by the law of sales.^[71][71]  Contracts of sale come with warranties, either express (if explicitly stipulated by the parties) or implied (under Article 1547 et seq. of the Civil Code).  In this case, however, the BANK does not even point to any breach of warranty by DELTA in connection with the Dation in Payment.  To be sure, the Dation in Payment has no express warranties relating to existing contracts to sell over the assigned properties.  As to the implied warranty in case of eviction, it is waivable^[72][72] and cannot be invoked if the buyer knew of the risks or danger of eviction and assumed its consequences.^[73][73]  As we have noted earlier, the BANK, in accepting the assigned properties as full payment of DELTA’s “total obligation,” has assumed the risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957. 

Award of damages

            There is nothing on record that warrants the award of exemplary damages^[74][74] as well as attorney’s fees^[75][75] in favor of the BANK.

Balance to be paid by Enriquez

As already mentioned, the Contract to Sell in favor of Enriquez must be respected by the BANK.  Upon Enriquez’s full payment of the balance of the purchase price, the BANK is bound to deliver the title over Lot 4 to her.  As to the amount of the balance which Enriquez must pay, we adopt the OP’s ruling thereon which sustained the amount stipulated in the Contract to Sell.  We will not review Enriquez’s initial claims about the supposed violation of the price ceiling in BP 220, since this issue was no longer pursued by the parties, not even by Enriquez, who chose not to file the required pleadings^[76][76] before the Court.  The parties were informed in the Court’s September 5, 2007 Resolution that issues that are not included in their memoranda shall be deemed waived or abandoned.  Since Enriquez did not file a memorandum in either petition, she is deemed to have waived the said issue.

            WHEREFORE, premises considered, the appealed November 30, 2004 Decision of the Court of Appeals, as well as its June 22, 2005 Resolution in CA-G.R. SP No. 81280 are hereby AFFIRMED with the MODIFICATIONS that Delta Development and Management Services, Inc. is NOT LIABLE TO PAY Luzon Development Bank the value of the subject lot; and respondent Angeles Catherine Enriquez is ordered to PAY the balance of the purchase price and the interests accruing thereon, as decreed by the Court of Appeals, to the Luzon Development Bank, instead of Delta Development and Management Services, Inc., within thirty (30) days from finality of this Decision.    The Luzon Development Bank is ordered to DELIVER a CLEAN TITLE to Angeles Catherine Enriquez upon the latter’s full payment of the balance of the purchase price and the accrued interests.

            SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

RENATO C. CORONA

Chief Justice

Chairperson

JOSE PORTUGAL PEREZ

Associate Justice

C E R T I F I C A T I O N

            Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA

Chief Justice