COCA-COLA BOTTLERS PHILS., INC., PETITIONER, V. SPOUSES EFREN AND LOLITA SORIANO, RESPONDENTS.

Coca-Cola Bottlers Philippines versus Spouses Soriano

The Case

This is a petition for review on certiorari brought by Coca-Cola Bottlers Philippines against the spouses Efren and Lolita Soriano, who were its dealers in Tuguegarao City. The spouses sued to annul a real estate mortgage over their land and the extrajudicial foreclosure sale that followed it, claiming they never truly agreed to mortgage their property and were never notified of the sale. The case matters because it draws a sharp line between the validity of a mortgage and the registrability of the deed that contains it — a distinction that decides who wins whenever a defective or unregistered mortgage deed is put in issue.

Procedural History

The spouses filed a complaint for annulment of the sheriff's foreclosure sale before the Regional Trial Court of Tuguegarao, Cagayan. The trial court ruled in their favor: it declared the real estate mortgage and the sheriff's certificate of sale null and void, declared the claim that the land had been mortgaged to the corporation unlawful, ordered the removal of the cloud on the spouses' title, ordered the surrender of the two transfer certificates of title, and awarded moral damages and attorney's fees.

Coca-Cola appealed to the Court of Appeals, which affirmed the trial court in full. The appellate court held that the mortgage deed failed to comply substantially with the required form: the spouses never acknowledged it before the Clerk of Court, and only one witness signed instead of the two required by law. Coca-Cola then came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

The spouses sold Coca-Cola products in Tuguegarao City. Sometime in 1999, through its general manager Cipriano, Coca-Cola told them it needed security to continue their business. The spouses were persuaded to hand over two certificates of title and to sign a document. Cipriano assured them it was a mere formality and would never be notarized.

Later, because of their advanced age, the spouses told Coca-Cola they intended to stop selling its products and verbally demanded the return of their titles. The titles were not returned. While contemplating a petition for new titles, they discovered for the first time that their land had been mortgaged in favor of Coca-Cola — and that the mortgage had already been foreclosed.

The spouses insisted they never signed a mortgage document, never received notice of the foreclosure sale, and owed Coca-Cola nothing, having always paid for deliveries in cash. They said they signed a document in Tuguegarao, never in Ilagan, Isabela, and never appeared before the notary on the date stated. Coca-Cola countered that the spouses were indebted to it, and that their admission of signing the mortgage deed in Tuguegarao showed the agreement was duly executed.

Issues

• Whether or not the real estate mortgage is valid despite the defective notarization of its deed and non-compliance with the prescribed form.
• Whether or not the spouses' admission that they signed the deed, coupled with their claim of fraud, defeats their action to annul the mortgage.
• Whether or not the extrajudicial foreclosure proceedings are valid.

Applicable Provisions

Article 2085 of the Civil Code provides:

Article 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.

These are the essential requisites of a mortgage, and the Court uses them to test validity apart from registration.

Article 2125 of the Civil Code provides:

Article 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

This is the decisive text: non-registration does not destroy the mortgage as between the parties.

Section 112 of Presidential Decree Number 1529 provides:

Deeds, conveyances, encumbrances, discharges, powers of attorney and other voluntary instruments, whether affecting registered or unregistered land, executed in accordance with law in the form of public instruments shall be registerable: Provided, that, every such instrument shall be signed by the person or persons executing the same in the presence of at least two witnesses who shall likewise sign thereon, and shall acknowledged to be the free act and deed of the person or persons executing the same before a notary public or other public officer authorized by law to take acknowledgment.

This supplies the formal requirements for registrability, which the Court holds are not the measure of validity.

Section 20 of Rule 132 provides:

Section 20. Proof of private document. - Before any private document offered as authentic is received in evidence its due execution and authenticity must be proved either: a) By anyone who saw the document executed or written; or b) By evidence of the genuineness of the signature or handwriting of the maker. Any other private document need only be identified as that which it is claimed to be.

Because the defective notarization reduces the deed to a private document, this is the standard of proof that governs.

Ruling

On the first issue, the Court ruled the mortgage valid. Registration is not essential to validity. Applying Article 2125, the Court held that as between the parties, the non-registration of a mortgage deed is immaterial, and if an unregistered mortgage binds the parties, all the more does a registered one. The Court found that the Court of Appeals erred in relying on the Cuyco pronouncements, which concerned a different question and did not put the mortgage's validity in issue.

On the second issue, the Court held that the spouses impliedly admitted the deed's due execution and genuineness by admitting they signed it. Their allegations amounted to a claim of fraud, not forgery. Fraud, to annul a contract, must be serious and must not have been employed by both parties; and a promise that the deed would not be registered or notarized amounts at most to incidental fraud, which does not avoid a contract. The Court quoted its earlier ruling:

In the present case, even if FEBTC represented that it will not register one of the REMs, PDCP cannot disown the REMs it executed after FEBTC reneged on its alleged promise. As earlier stated, with or without the registration of the REMs, as between the parties thereto, the same is valid and PDCP is already bound thereby.

The Court added that the defective notarization merely stripped the deed of its public character and reduced it to a private document, so the test became preponderance of evidence — and the preponderance tilted to Coca-Cola, given the spouses' admission and their surrender of the titles.

On the third issue, the Court found no reason to nullify the foreclosure. Personal notice to the mortgagor is not required unless stipulated; the law requires only posting and publication, and the foreclosure had been nullified below merely as a consequence of the nullified mortgage.

Doctrine

A bar candidate should retain these rules. First, the validity of a real estate mortgage depends on the requisites of Article 2085, not on registration; under Article 2125, an unregistered mortgage is nevertheless binding between the parties. Second, the formal requirements of Section 112 of Presidential Decree Number 1529 govern registrability, not validity. Third, a defective notarization strips a deed of its public character and reduces it to a private document, shifting the standard to preponderance of evidence under Section 20 of Rule 132. Fourth, a party who admits signing a mortgage deed cannot later claim forgery; a claim that assurances were made that the deed would not be notarized or registered sounds in fraud, which renders the contract merely voidable, not void.

Disposition

The petition was granted; the decisions of the trial court and the Court of Appeals were reversed and set aside, and the spouses' complaint was dismissed for lack of merit.

Remember This

Memorize this line: registration is not essential to the validity of a mortgage, for even an unregistered mortgage is binding between the parties. Examiners use this case to test the validity-versus-registrability distinction, the effect of defective notarization, and the difference between forgery and fraud in attacking a mortgage deed.