E. C. MCCULLOUGH & CO., INC., PLAINTIFF AND APPELLANT, VS. MARIANO VELOSO AND JOAQUIN SERNA, DEFENDANTS. MARIANO VELOSO, APPELLANT.

AVANCEÑA, C.J.:


On March 23, 1920, the plaintiff corporation, E. C. Mc-Cullough & Co.,
Inc., sold to Mariano Veloso the property known as “McCullough Building,”
consisting of a land, with the building thereon, described in the certificate of
title No. 13274, for the price of P700,000, Veloso having paid P50,000 cash on
account at the execution of the contract, the balance of P650,000 to be paid,
according to the contract, as follows: P50,000 on May 1, 1920; P100,000 on
October 31 of the same year; P100,000 on April 1, 1921; P100,000 on April 1,
1922; P100,000 on April 1, 1923; P100,000 on April 1, 1924, and P100,000 on
April 1, 1925, all of said amounts to draw interest at the rate of 7 per cent
per annum, payable semestrally on the first days of April and October of each
year. Veloso agreed, furthermore, to pay 10 per cent of the amount of the debt,
as attorney’s fee, in the event that a judicial action should be necessary for
the collection of the whole or a part of the debt. Veloso assumed also the
obligation to insure the property for not less than P500,000, as well as to pay
all legal taxes that might be imposed upon the property, and in the event of his
failure to do so, the plaintiff should pay said taxes at the expense of Veloso,
with the right to recover of him the amounts thus paid, with interest at 7 per
cent per year. To secure the payment of these amounts, Veloso mortgaged the
property purchased, this encumbrance having been noted on the certificate of
title No. 13274. It was, finally, stipulated that in case of failure on the part
of Veloso to comply with any of the stipulations contained in the mortgage deed,
all the instalments with the interest thereon shall become due, and the creditor
shall then have the right to bring the proper action for the collection of the
unpaid part of the debt.

On August 21, 1920, Mariano Veloso, in turn, sold the property, with the
improvements thereon for P1,00,000 to Joaquin Serna, who agreed to respect the
mortgage of the property in favor of the plaintiff and to assume Mariano
Veloso’s obligation to pay the plaintiff the balance due of the price of the
estate on the respective dates when payments should be made according to the
contract between Mariano Veloso and the plaintiff, dated March 20, 1920.

Veloso paid P50,000 on account of the P650,000, and Serna made several
payments up to the total sum of P250,000. Subsequently, however, neither Veloso,
nor Serna, made any payment upon the last instalments, by virtue of which delay,
the whole obligation became due, and Veloso lost the right to the instalments
stipulated in his contract with the plaintiff. Later on Clarke & Larkin,
accountants, made a liquidation of the debt of Mariano Veloso in favor of the
plaintiff, including the interest due, with the result that on March 26, 1923,
Veloso owed exactly P510,047.34. The accuracy of this statement of the account
is not disputed.

The plaintiff brings this action to recover of the defendant the sum due of
P510,047.34 plus 10 per cent thereon as attorney’s fee. The trial court
sentenced the defendant to pay the plaintiff the sum claimed with interest
thereon at 7 per cent per annum from March 26,1923, when the liquidation was
made of the defendant’s debt, until full payment thereof. As to the 10 per cent
on the amount due that the plaintiff claims as attorney’s fee, the trial court
allowed P2,000 only. The judgment contains, furthermore, an order providing that
the payment of these amounts should be made within three months, and that, in
the event of a failure to do so, the property mortgaged, described in the
certificate of title No. 13274, shall be sold at public auction to the highest
bidder and in the manner prescribed by law, the proceeds of the sale to be
applied on the payment of the judgment, after deducting the fees of the court’s
officer, and in case the total amount of the judgment is not covered, a writ of
execution shall be issued against other properties of the defendant Mariano
Veloso until the whole amount of the judgment is covered. Both parties appealed
from this judgment, the defendant in so far as he is sentenced to pay the
plaintiff the sum of P510,047.34, and the mortgaged property is ordered sold for
the payment of the judgment; and the plaintiff in so far as the 10 per cent on
the amount due and claimed as attorney’s fee was reduced to P2,000.

The defendant contends that having sold the property to Serna, and the latter
having assumed the obligation to pay the plaintiff the unpaid balance of the
price secured by the mortgage upon the property, he was relieved from this
obligation and it then devolved upon Serna to pay the plaintiff. This means that
as a consequence of the contract between the defendant and Serna, the contract
between the defendant and the plaintiff was novated by the substitution of Serna
as a new debtor. This is untenable. In order that this novation may take place,
the law requires the consent of the creditor (art. 1205 of the Civil Code). The
plaintiff did not intervene in the contract between Veloso and Serna and did not
expressly give his consent to this substitution. Novation must be express, and
cannot be presumed.

In connection with the contention of the defendant, the fact that the
plaintiff did not oppose the sale subsequently made by the defendant to Serna of
the mortgaged property does not mean anything. The mortgage is merely an
encumbrance upon the property and does not extinguish the title of the debtor,
who does not, therefore, lose his principal attribute as owner, that is, the
right to dispose. This being so, the fact that the plaintiff recognized the
efficaciousness of that sale cannot prejudice him, which sale the defendant had
the right to make and the plaintiff cannot oppose and which, at all events,
could not affect the mortgage, as the latter follows the property whoever the
possessor may be. (Art. 1876 of the Civil Code.)

The defendant argues in this court that the law on novation is not applicable
to the contract of mortgage. This is an error. But considering the matter from
this standpoint of view of the defendant, leaving aside all question as to
novation, his claim appears still more clearly to be groundless. The effects of
a transfer of a mortgaged property to a third person are well determined by the
Civil Code. According to article 1879 of this Code, the creditor may demand of
the third person in possession of the property mortgaged payment of such part of
the debt, as is secured by the property in his possession, in the manner and
form established by the law. The Mortgage Law in force at the promulgation of
the Civil Code and referred to in the latter, provided, among other things, that
the debtor should not pay the debt upon its maturity after a judicial or
notarial demand for payment has been made by the creditor upon him. (Art. 135 of
the Mortgage Law of the Philippines of 1889.) According to this, the obligation
of the new possessor to pay the debt originated only from the right of the
creditor to demand payment of him, it being necessary that a demand for payment
should have previously been made upon the debtor and the latter should have
failed to pay. And even if these requirements were complied with, still the
third possessor might abandon the property mortgaged, and in that case it is
considered to be in the possession of the debtor. (Art. 136 of the same law,)
This clearly shows that the spirit of the Civil Code is to let the obligation of
the debtor to pay the debt stand although the property mortgaged to secure the
payment of said debt may have been transferred to a third person. While the
Mortgage Law of 1893 eliminated these provisions, it contained nothing
indicating any change in the spirit of the law in this respect. Article 129 of
this law, which provides for the substitution of the debtor by the third person
in possession of the property, for the purposes of the giving of notice, does
not show this change and has reference to a case where the action is directed
only against the property burdened with the mortgage. (Art. 168 of the
Regulation.)

Finally, the fact that the plaintiff has received payments from Serna on
account of Veloso’s debt is of no importance, for this is, at most, a payment
tyy a third person, which, while it may create a juridical relation between
Serna and Veloso, cannot affect the relation between the latter and the
plaintiff, except that the obligation thus paid is discharged.

With reference to the appeal of the plaintiff, it appears that the 10 per
cent of the amount of the debt, which, according to the contract between the
defendant and the plaintiff, must be paid by the former to the latter as
attorney’s fee in the event that judicial proceeding be instituted for the
collection of the debt, was reduced by the trial court to P12,000. Following the
doctrine laid down by this court in the case of Bachrach vs. Golingco (39 Phil.,
138), and taking into account the amount of the debt and the work it may require
on the part of the attorney to collect the same by judicial proceeding, we find
that P15,000 is the reasonable amount which the plaintiff is entitled.

Wherefore the judgment appealed from is affirmed as to defendant’s appeal,
and modified as to plaintiff’s, who is allowed P15,000 instead of P2,000 awarded
by the trial court, without special finding as to costs. So ordered.

Araullo, C. J., Malcolm, Johns, and Romualdez, JJ.,
concur.

DISSENTING IN PART

JOHNSON, J.:

The question here is not one of the
reasonableness of attorney’s fees under section 29 of Act No. 190, between
attorney and client. The contract simply provided for a certain amount to cover
expenses of collection, in case the defendant failed to comply with his
contract. If the defendant believed that the amount was unreasonable or
unconscionable, that question should have been settled at the time the contract
was executed and delivered, or during the trial of the cause in the court below.

CONCURRING AND DISSENTING:

STREET, J.:

I concur in the fundamental propositions
involved in the case and in the action of the court in materially increasing the
attorney’s fee over the amount allowed by the trial judge. At the same time I
wish to say that, considering the unusually large amount involved in the
litigation and the nature of the service rendered, the amount finally allowed by
this court is extremely conservative. The fee allowed should, in my opinion,
have been not less than P20,000. The law applicable to the case is correctly
stated in Bachrach vs. Golingco (39 Phil., 138).

CONCURRING AND DISSENTING

OSTRAND, J.:

I concur in the opinion of the court except in so far as it sets aside the
contract between the parties in regard to the amount of the attorney’s fees.

That the court has extensive powers of control over contracts between an
attorney and his client I do not dispute. A lawyer is an officer of the court
and as such is, in a large measure, subject to its control. By reason of the
trust and confidence presumed to be reposed in the lawyer by his client,
contracts between them are closely scrutinized in order to prevent overreaching
and courts have not hesitated to summarily reform such contracts wherever it
clearly appears that unfair advantages have been taken of the client.

But the contract here in question is not one between attorney and client;
here the parties were presumably of equal intelligence and have dealt with each
other at arm’s length and on equal terms. In common with other ordinary
contracts between competent parties, the contract before us should therefore not
be interfered with unless it is fraudulent, unconscionable or contrary to public
policy, and then only when put in issue by the pleadings and after due
trial.

In this case the validity of the agreement for allowance of attorney’s fees
is not questioned in the pleadings and, as far as the record shows, the
plaintiff was not apprised of the defendant’s intention to dispute the fairness
of the agreement until after the presentation of the evidence in the case.

The allowance of fees provided for in the contract may seem rather high, but
considering that the amount involved in the case is nearly a half a million
pesos and that every step in the foreclosure proceedings has been tenaciously
contested, it can hardly be said that the agreement is so unconscionable per se
as to justify the court in setting it aside without due process of law.