ERNEST BERG, PLAINTIFF AND APPELLANT, VS. VALENTIN TEUS, DEFENDANT AND APPELLANT.

Late in September, 1944, defendant Valentin Teus applied from
plaintiff Ernest Berg, and the latter granted him, “a credit line up to
P80,000,” to be available to Teus “for the discounting of promissory
notes payable on demand two (2) years after the declaration of
Armistice , between Japan and the United States of America, but never
before that date, bearing interest at the rate of eight (8%) per cent
per annum.” Soon after, Teus obtained from Berg the aggregate sum of
P80.000, covered by six (6) promissory notes issued and delivered by
the former to the latter. To guarantee compliance with the obligation
thus contracted by him, Teus executed in Manila, on November 22, 1944,
a real estate and chattel mortgage, on several parcels of land situated
in the municipality of Candon, Ilocos Sur, and the machineries and
equipment of the Central Azucarera del Norte, operated thereon, and
belonging exclusively to Teus. Among other things, it was stipulated in
the deed of mortgage, that Teus shall seasonably pay such taxes on the
mortgaged property, as may be due from time to time; that he shall not
alienate, encumber, or otherwise dispose of said property, or make any
material alteration thereon, without the previous consent, in writing,
of Berg; and that, in case of failure of the mortgagor to comply with
any of his obligations under said deed, the mortgage shall be
automatically foreclosed, and the mortgagee could proceed with the
foreclosure, either extra-judicially or judicially, with the right, in
the latter case, to the appointment of a receiver without bond, in
addition to “attorney’s fees and costs of collection to an amount equal
to ten per cent (10%) of the total indebtedness then unpaid, but not
less than two Hundred (P200) Pesos, apart from all costs and fees
allowed by the Rules of Court. . .”

Alleging that the mortgagor had violated said provisions of the deed
of mortgage, on May 19, 1948, plaintiff instituted this action in the
Court of First Instance of Ilocos Sur and prayed in the complaint that
the mortgage in question be automatically foreclosed, a receiver
appointed, and judgment rendered against the defendant for the sum of
P80,000, with interest thereon, at the rate of 8 per cent per annum,
from November 22, 1944 until full payment, plus 10 per cent of the
principal and interest, as attorney’s fees, and the sum of P385.57 for
the registration of the deed of mortgage, in addition to the costs. On
motion of Teus, predicated upon the Moratorium Law, the lower court
dismissed the case, but, on appeal, this Court reversed the order of
dismissal and remanded the case to the court of origin for further
proceedings. Subsequently, Teus filed an answer, admitting some
allegations of the complaint, denying other allegations thereof, and
setting up several special defenses and counterclaims.

After submission of the case for decision, upon a partial
stipulation of facts and the evidence presented, the Court of First
Instance of Ilocos Sur rendered a decision, the dispositive part of
which reads as follows:

“Por consiguicnte, el Juzgado dicta decision en esta
causa declarando al demandado Sr. Don Valentin Teus en deber al
demandante Sr. Don Ernest Berg en la cantidad de Ochenta mil pesos
(P80,000) con los intereses pactados de Ocho por ciento (8%) de esta
suma desde el 22 de Noviembre de 1944 hasta el dia de su completo pago,
mas P248.80 por el registio de la Escritura de Ilipoteca Exhibit A y la
rcconstitucion de los corrcspondientes Certificados de Titulos, las
costas de apclacion (en G. R. No. L-2987) y las costas en esta
instancia; ordenando a dicho demandado a pagar al referido demandante o
depositar en este Juzgado, dentro del periodo de 90 dias desde la
fecha del servicio de esta decision, las cantidades susodichas, con Ja
advertencia de que, en defecto de dicho pago o deposito, se dispondra
que, en la forma y bajo las regulacionos que rigen las ventas de bienes
raices en virtud de ejecucion, so vendan de las propiedades hipotecadas
Begun la Escritura Exhibit A unido a la “Completa Demanda” aquellos
bienes solamente con cuyo importe se cubran o satisfagan las expresadaa
cantidades, sin perjuicio de que, conforme al pronunciamiento directivo
de la Hon. Corte Suprema en G. R. No. L-2987, el demandado pueda pedir
la suspension de la ejecucion fundandose en la moratoria y el
demandante pueda impugnar la constitucionalidad de las Ordenes
Ejecutivas Nos. 25 y 32, y la Ley No. 342 de la Itepublica; denegando
la peticion de nom-bramiento de depositario y de confirmacion de la
alegada automatica designaeion del demandante corao apoderado legal y
absolviendo plenamente a Mr. Ernest Berg de la contrademanda, sin
especial prommciainiento en cuanto de las costaa ocasionadas en Virtud
de esta.” (Joint Record on Appeal, pp. 146-147,)

Both parties have appealed from this decision. Plaintiff maintains that the lower court erred:

“1. In failing to render judgment in favor of
plaintiff for the 10 per cent attorney’s fees provided for in the real
and chattel mortgage, quoted in the Record on Appeal; pages 13 to 94,
and 97 to 1C9.

“2. In failing to uphold and give effect to all the agreements in that mortgage (Record on Appeal pages 20 and 103).

“3. In not granting plaintiff’s motion for reconsideration.” whereas the defendant contends that:

“El
Juzgado inferior erro al condenar al demandado-apelante Valentin Teus,
a pagar al demandante-apelante la suma de ochenta mil pesos (P80,000)
con interescs al 8 por ciento anual dosde el 31 de Octubre de 1944
hasta su completo pago en moneda de circulation corriente.”

Briefly stated, it is urged by the plaintiff that the defendant had
violated the terms and conditions of the aforementioned deed of
mortgage, inasmuch as he had been in default in the payment of taxes
and had conveyed to J. A. Elizalde and Manuel Elizalde the property in
question, and made material alterations thereon, without the consent of
the plaintiff, who, accordingly, insists that the lower court should
have, likewise, sentenced the defendant to pay the special indemnity
provided therefor in the contract—and to which reference has been made
in the preceding paragraphs—as prayed for in the complaint.

In this connection, it should be noted that during the occupation of
the Philippines by the Japanese, and, hence, at the time of the
execution and delivery of the promissory notes and the deed of mortgage
above referred to, the Central Azucarera del Norte was in the
possession and control of, as well as under operation by, the Japanese
Military Administration. Plaintiff Ernest Berg was aware of this fact.
Before abandoning the property, upon the liberation of the
Philippines,, the Japanese blew up the central, destroyed its machinery
and carried away some of its equipment. In order to rehabilitate the
central, on January 30, 1946, Teus entered into a contract with J. A.
Elizalde and Manuel Elizalde, pertinent provisions of which we quote:

“3. The Owner states and makes known that the Central Azucarera Del Norte had a mortgage account with the Philippine National Bank in the sum of Two Hundred Thousand Pesos (P200,000) as above stated, settlement whereof was made on or about September and October, 1944, and
fully realizes that the validity of such payment is for the present not
definitely settled and determined by congressional action or judicial
pronouncement, and therefore said Owner agrees with Elizalde that the
latter shall be entitled as of right to withhold payment of the
promissory notes aforementioned to the extent of Two Hundred Thousand
Pesos (P200,000) until such time as a definite policy or ruling shall
have been made on the question of the validity of the payment made with
the Philippine National Bank in settlement of the Owner’s mortgage
‘account. The Owner further states that his subsequent mortgage obligation with Ernest Berg of Eighty Thousand Pesos (P80,000),
consummated on November 22, 1944, is likewise in the nature of a
contingent liability the validity of which remains to be determined by
congressional action and judicial interpretation, and agrees in
relation thereto that Elizalde may withhold payment of the promissory
notes aforementioned to the extent of Eighty Thousand Pesos (P80,000)
until the validity of said transaction is definitely determined.

“In
the event that the aforementioned obligations of the Owner with the
Philippine National Bank and Ernest Berg in their respective
agreements, shall be held to be valid and the liabilities thereunder to
be subsisting and enforceable, Elizalde may pay such amount to the
parties concerned out of the remaining balance of the Owner’s credit
with Elizalde.

“4. Once a definite policy or ruling has been
laid down by congressional act and/or judicial pronouncement on the
validity of payments made by the Owner to the Philippine National Bank
and/or legality and subsistence of his real estate and chattel mortgage
with Ernest Berg, Elizalde agrees to form with the Owner a new
corporation the name of which is to be designated later, with an
authorized capital stock of Nine Hundred Thousand Pesos (P900,000),
divided into Nine Thousand (9,000) shares with a par value of One
Hundred Pesos (P100) each share, which will absorb all assets of
Central Azucarera Del Norte, and the interest of Elizalde and the Owner
in the new entity will be on the basis of 5/9 for the former and 4/9
for the latter. Both Elizalde and the Owner may designate their
respective nominees to the corporation which may be formed pursuant to
this agreement,

“6. The parties agree that Elizalde & Co., Inc. shall operate and be appointed General Managers for Central Azucarera Del Norte or
of the new corporation to be organized later, and that said Elizalde
& Co., Inc. may finance the reconstruction of the Central under
terms and conditions to be agreed upon. * * *.” (Exhibit 1-9,
Stipulation of Facts, pp. 116-119; underscoring supplied.)

Berg was then confined on charges of collaboration and his consent
to said contract between Teus and the Elizaldes was not secured. On
February 5, 1946, Teus sold one thousand (1,000) of his shares in the
Central Azucarera del Norte to Patrocinio Roco, with the obligation on
his part to transfer and deliver to her the corresponding certificate
of stock upon the incorporation of the Central and the issuance of said
certificate of stock.

Although no insurance on the mortgaged properties had been taken
prior thereto, on February 4, 1948, the Central Azucarera del Norte
insured said properties against fire for P100,250.00. The next day,
said Central obtained from the Commissioner of Securities and Exchange
the corresponding certificate of incorporation. Such was the situation
when plaintiff commenced this action on May 19, 194S. , Soon after, or
on June 18, 1948, Teus executed a deed of transfer in favor of the
corporation, Central Azucarera del Norte, containing the following
stipulations:

I

“For and
in consideration of Nine Thousand (P9,000) fully paid up shares of the
capital stock of a corporation to be formed under the laws of the
Philippines, to be known as ‘Central Azucarera Del Norte‘, of
a par value each of One Hundred (P100) Pesos, Philippine Currency to be
issued upon the formation of said corporation to the following named
persons as nominees of said Grantors, to wit:

J. M. Elizalde	2,499 Shares
Jose Yulo	1 Share
Valentin Elizalde	2,499 Shares
Valentin Teus	4,000 Shares
Celso Lobregat	1 Share
Total	9,000 Shares

and in consideration further of the undertaking and agreement of said ‘Central Azucarera Del Norte‘,
to assume all the liabilities of the Grantors as shown by its books at
the close of business on December 31, 1946, the Grantors have sold,
transferred, conveyed, assigned and set over and do by these presents
sell, transfer, convey, assign and set over unto the Grantee, Rafael
Beltran,. as Treasurer of said ‘Central Azucarera Del Norte‘,
in trust for the benefit and to the credit of said corporation, all the
property and assets, real, personal or mixed, of the Grantors as of the
close of business on said December 31, 1946, all of which property and
assets are more particularly described in the annexed schedule marked
Annexes ‘A’ and ‘B’ and made a part hereof; it being’ expressly
understood and agreed that this sale, assignment and transfer includes
any and all property, real, personal, or mixed, property rights and
leasehold rights, rights under powers of attorney, and any and all cash
on hand or in bank, as well as any and all goods, chattels, credits,
accounts receivable, bills, notes, contracts, agreements, securities
fixtures, equipment, apparatus, materials, goodwill, chooses in action,
and all other property, assets and appurtenances belonging to and
forming part of the business of the Grantors as of the close of said
business on December 31, 1946, whether described and enumerated in said
Annexes ‘A’ and ‘B’ hereof of or not, including the right to use the
firm name ‘Central Azucarera Del Norte‘.

“It is understood and agreed that as soon as said corporation to be formed, ‘Central Azucarera Del Norte‘,
shall become a legal corporate entity, this sale, transfer and
assignment shall operate Ipso facto’ to vest the title to the property,
assets and appurtenances hereby sold, transferred and assigned in the
said ‘Central Azucarera Del Norte‘, as fully and effectually as though they have been regularly and formally sold, transferred and assigned to said corporation.

II

“As part of the consideration for the sale, transfer, and assignment as above set forth; the said ‘Central Azucarera Del Norte‘
upon its becoming a legal entity, shall undertake, assume, pay,
satisfy, and discharge, all the debts and liabilities, and shall
perform and fulfill all contracts, engagements and obligations, of
whatsoever kind and nature in relation to or connected with the
property, asset3 and business hereby sold by said Grantors, and shall
be subrogated in all actions, proceedings, claims and demands in
respect thereof.

III

“This
sale and transfer shall be subject in all respect to the terms,
conditions and stipulations of that certain agreement executed between
Valentin Tens and J. M. Elizalde and Manuel Elizalde on the 30th
day of January, 1946, before Notary Public Pacifico de Ocampo of the
City of Manila, and identified in the latter’s registry as Doc. No. 44,
Page No. 11, Book No. II, Series of 1946, herein made a part of this
instrument as Annex ‘C’, and to that certain real estate and
chattel mortgage executed between Valentin Tens and Ernest Berg on the
22nd day of November, 1944, before Notary Public F. S. Falgui of
the City of Manila, and identified in the latter’s registry as Doc. No.
41, Page No. 10, Book No. V, Series of 1941, herein incorporated to
this instrument as Annex ‘D’.

IV

“Valentin Teus for his part agrees that as soon as the corporation ‘Central Azucarera Del Norte‘
shall have been formally organized, said corporation shall retain and
hold in trust for him, shares of stocks of said corporation with a par
value of Two Hundred Eighty Thousand P280,000 Pesos, to answer for
any contingent liability provided for in clauses 3 and 4 of the
agreement of January 30th, 1946.

V

“The
Grantors herein, individually or jointly, hereby undertake and agree to
sign, execute and deliver to and in favor of said Rafael Beltran as
Treasurer of said ‘Central Azucarera Del Norte‘, or to and in
behalf of the latter corporation, upon its formation, upon demand, such
deeds, instruments or other writings as may be convenient and necessary
to make this transfer and assignment effective.” (Exhibit J-ll, Folder
of Stipulation of Facts, pp. 143-147; Italics supplied.)

According to paragraphs 13-a and 13-b of the stipulation submitted by the parties:

“13-a. Que desde la constitucion de la corporacion denominada con el nombre ‘Central Azucarera Del Norte‘
hasta la actualidad el demandado Valentin Teus dejo y entrego, la
poeesion y custodia de 800 acciones del capital de dicha corporacion,
por un valor de P80,000 y pertenecientes a el exclusivamente, al
Tesorero de dicha corporacion Sr. Rafael Beltran para tenerlo en
Fideicomiso con el fin de responder de la responsabilidad que dicho
Valentin Teus tiene a favor del demandantc Ernest Berg y el resto de
sus acciones propias o sea 2,200 acciones de una valor par de P220,000
en la referida corporacion, ‘Central Azucarera Del Norte‘,
tambien los dijo en poder y possesion del mismo Tesorero, Sr. Rafael
Beltran, para responder do la misma obligacion en favor del demandante,
segun se comprueba por el Certificado librado por dicho Tesorero Sr.
Rafael Beltran que se acompaña a esta estipulacion y se marca corao
Exh. L-13.

“13-b. Que en 11 de Noviembre de 1949, el demandado Valentin Teus otorgo un convenio eon la Central Azucarera Del Norte
y los Sres. Elizalde & Co. Inc., por virtud, del cnal, arrendo por
el periodo de 8 anos o sea desde Noviembre 11, 1949 o Octubre 11, 1957,
toda la Central Azucarera Del Norte con sus maquinarias e
implementos incluyendo las quotas de aznear pertenecientes a la misma,
y los tcrrenos, mediante un pago anual de P50,000 y los intereses
anuales que la Central Azucarera Del Norte debe de pagar a
los Sreg. Elizalde, por el balance de la cuenta con dichos Elizaldes:
con el convenido adernas, de que a la tei’minacion del periodo del
contrato, si el demandado ha cumplido con regularidad en el pago de las
rentas convenidas y sus intereses, tendra opcion exclusiva de
pedir que se apliquen todos los pagos de alquileres asi heclios, al
pago de todos los derechos, participacion e intereses de los Sres.
Eliaalde en la corporacion denorainada Central Azucarera Del Norte y los Sres. Elizalde traspasaran al Sr. Valentin Teus todas las 6,000 acciones que poseen en dicha Central Azucarera Del Norte, quedando exclusivo dueño
de la corporacion, del negocio y de todas sus maquinarias, terrenos
etc., el aqui demandado, Valentin Teus, una copia de esta estipulacion
o convenio se acompaña a esta estipulacion y se marca Exhibito L-14. (Joint Record on Appeal, pp. 86-88.)

It further appears that, as of September 4, 1948, the property in
question were delinquent in the payment of real estate taxes for the
years 1947 and 1948, in the total sum of P3,134.35; which, together
with the taxes which fell due in the meantime, were fully paid by Teus
on or before December 6, 1951 (Exhibit 8).

As of December 31, 1951, the Central Azucarera del Norte
had, however, a net asset of Pl,079,302.10, after allowing 10 per cent
for depreciation without any liability other than the obligation in
favor of plaintiff herein, for P80,000, with interest thereon.

In the light of the foregoing facts, although there has been a
technical violation of the terms and conditions of the deed of mortgage
above referred to, owing to delinquency in the payment of taxes, the
conveyance to the Elizaldes, and the material alterations made in the
mortgaged properties, without the consent of the mortgagee, the
circumstances surrounding these events fully justify the action taken
by His Honor, the trial Judge, for the following reasons, namely:

1. When the promissory notes and the deed of mort gage in question were executed, plaintiff knew that the Central Azucarera del Norte
   was in the possession and under the control of the Japanese. He must
   have known that the mortgaged properties were subject to the inci dents
   of the hostile military occupation and must have been willing to
   assume, therefore, the corresponding risks, including that oi the
   subsequent damage to said properties due to acts of the Japanese
   forces, which were beyond defendant’s control.

2. Although the contracts with the Elizaldes were executed, and the
   corresponding alterations in said properties were made, without
   plaintiff’s consent, said acts were per formed precisely to restore
   said properties to the original condition thereof. Wliat is more, the
   Elizaldes were ad vised by the defendant of his obligation in favor of
   the plaintiff, and proper arrangements were made with the Elizaldes and
   the Central to protect sufficiently the rights of the plaintiff, to
   wit: (a) by depositing with the treas urer of the corporation, 800 of
   defendant’s shares of stock therein, with an aggregate par value of
   P80,000, in trust and for the benefit of plaintiff Ernest Berg apart
   from 2,200 shares of stock of the defendant, with an ag gregate par
   value of P220,000.00, likewise, to answer for the payment of the credit
   of plaintiff herein; and (b) by entering into a contract of lease, at a
   reasonable rental, whereby defendant was given the option to apply the
   same to the purchase of the rights of the Elizaldes and, hence, to reacquire full ownership of the Central,
   the net assets of which, as of December 31, 1951, are worth
   P1,079,302.10, without any pending obligation, except that existing in
   favor of plaintiff herein. In other words, the aforementioned acts of
   the defendants have inured to the benefit of plaintiff, Ernest Berg. It
   is clear, however, that such acts could not have been understood by the
   parties to the deed of mortgage as a “violation” of the rights of the
   mortgagee. Hence, the special indemnity stipulated in said deed, for
   the event of violation thereof, could not have been intended to apply
   to a situation like the one under consideration.

3. The delinquency in the payment of the real estate taxes for 1947 and
   1948, is easily understandable when we consider that the mortgaged
   property was unproductive, owing to the extensive damages caused by the
   Japanese, and would have remained unproductive to this day, were it not
   for the efforts of the defendant to rehabilitate the central by
   incorporating the same with the financial backing of the Elizaldes. At
   any rate, said taxes were paid on or before December 6, 1951, and any
   substantial injury to the rights of the plaintiff herein was thus
   avoided. Indeed, although technically mortgaged to him since 1944, the Central Azucarera del Norte
   was then of no value to the plaintiff, it being in the hands of the
   Japanese at that time. Neither was it of any practical value to him
   upon the liberation of the Philippines, in view of the condition in
   which it was left by the Japanese. Now, thanks to the defendant, there
   is a reconstructed central, operated by the defendant himself and
   producing under his seemingly competent management. Surely, he does not
   deserve to be penalized for this.

Invoking equity, defendant, in turn, alleges that instead of paying
P80,000 with the corresponding interest, in Philippine currency, for
P80,000, which he claims to have received in Japanese military notes
in 1944, he should be allowed to settle his obligation in conformity
with the Ballantyne schedule. Equity demands, however, that he live up
to the terms of his contract, which clearly contemplates payment of
P80,000 in genuine Philippine currency, not only because his promissory
notes specifically provide that payment shall be made in “Philippine
Treasury Certificates” but, also, because under the terms of the deed
of mortgage, payment of said promissory notes shall be demandable “two
(2) years after the declaration of Armistice between Japan and the United States of America, and never before.” On this point, the decision appealed from merely adheres to the long line of decisions of this Court thereon. (Roño vs. Gomez,46 Off. Gaz., [Suppl. No. 11] 339; Gomez vs. Tabia, 47 Off. Gaz., [Suppl. No. 2] 641; Arevalo vs. Barreto, 89 Phil., 633; De la Cruz vs. Del Rosario G. R. No. L-4859, Minute Resolution of July 24, 1951, and Garcia vs. De los Santos, 93 Phil., 683, 49 Off. Gaz., 4830.)

However, the reservation, made in said decision, in favor of the
defendant, of the right to ask the suspension of its execution,
pursuant to the provisions of the Moratorium Laws (Executive Orders
Nos. 25 and 32, and Republic Act No. 342), although proper at the time
of the rendition of said decision (April 10, 1952), is no longer in
order, in view of our decision in the case of Rutter vs. Esteban, 93 Phil., 63, declaring said laws unconstitutional.

Wherefore, with the elimination of said reservation, the decision
appealed from is hereby affirmed, in all other respects, without
special pronouncement as to costs in this instance. So ordered.

Paras, C. J., Bengzon, Padilla, Montemayor, Reyes, A., Baulista Angelo and Reyes, J. B, L., JJ., concur.