ANTONIO TAMBUNTING AND AURORA TAMBUNTING, PETITIONERS, VS. REHABILITATION FINANCE CORPORATION (NOW DEVELOPMENT BANK OF THE PHILIPPINES), HEIRS OF JOSE ESCUETA AND ELEUTERIA ESCU…

A contract is the law between the parties and, absent any showing
that its provisions are wholly or in part contrary to law, morals, good
customs, public order, or public policy, will be enforced to the letter by the
Courts.  Application of this fundamental
principle is all that is required to resolve the controversy at bar.1

The root of the dispute is traceable to loans obtained by the
Spouses Jose and Eleuteria Escueta
from the Rehabilitation Finance Corporation (RFC) in the aggregate sum of
P59,000.00.  The loans were secured by a
mortgage constituted by said spouses over land (and improvements thereon) owned
by them, covered by Transfer Certificates of Title Numbered 493 (39774) and 494
(39775) of the Registry of Deeds of Pasay City.1

Later, and with the consent of the RFC, the Escuetas
created a second mortgage over the same property as security for a loan in the
amount of P16,000.00 obtained by them from the Spouses Antonio and Aurora
Tambunting.2
Both first and second mortgages were recorded in the Registry of Deeds of Pasay City.3

The Escuetas defaulted in the payment
of both loans.  The Tambuntings
consequently instituted an action of foreclosure of their second mortgage in
the Court of First Instance of Pasay City.4
Some three months later, the RFC commenced proceedings for the extra-judicial
foreclosure of its first mortgage, which resulted in the sale at public auction
of the mortgaged property to the highest bidder, the RFC itself, subject to the
right of redemption of the mortgagors, the Escuetas.5 The RFC then applied for and
obtained a writ of possession from the proper Court and in virtue thereof, took
possession of the foreclosed property.6

About eight (8) months after the foreclosure sale, the Tambuntings, as second mortgagees, offered to redeem the
property.7
The RFC agreed, subject to the Escuetas’ right of
redemption as former owners thereof.8 Their agreement was reduced to
writing, entitled “Deed of Conditional Sale.” Under it, the RFC sold
the property in question to the Tambuntings for
P74,643.98, 20% of which (P14,928.89) was given as down payment, and the
balance was amortized over a period of ten (10) years.9
The deed also contained the following stipulation,10
among others:

This contract may be revoked within one (1) year from September 16, 1955 at the option of
the vendor should the former owner exercise his right to redeem the property
herein sold.  In case the property is
redeemed or repurchased within said period by the former owner or his
successor-in-interest, the vendor shall refund to the vendees any and all
amounts that the vendees may have paid to the vendor under the conditional sale
with interest as provided for by law, rendering, thereby this instrument
automatically null and void and without effect.

The Tambuntings took possession, and
commenced to collect the rentals from the tenants thereof after notifying them
of the deed of conditional sale in their favor.1 In this connection, the deed also
provided that in the event of redemption by the former owner, “all rentals
collected will be deducted from the redemption price.”2

About a month later, the Escuetas
learned of the sale in favor of the Tambuntings.  Three (3) days before the expiry of the
stipulated redemption period, the Escuetas, having
been unable to raise the amount to effect redemption, assigned their right to
repurchase to the spouses Demetrio Hernandez and Candelaria Paguio in
consideration of the sum of P15,000.00.3 On the day following, Hernandez
went to the RFC and exercised the right of redemption assigned to him by making
a deposit of P19,088.89, and formally undertaking to pay the balance of the repurchase
price in fixed monthly installments over a period of ten (10) years at 6%
interest per annum, these being the terms specified by the RFC for redemption,
set out in its Chairman’s letter sent to the Escuetas
three months after the foreclosure.4

The RFC then notified the Tambuntings
that their contract of conditional sale was deemed revoked in view of the
redemption by Hernandez, the Escuetas‘ successor-in-­interest.5

On the same day the Tambuntings wrote
to the RFC, “vehemently” protesting the acceptance by the RFC of the
redemption by the Hernandezes “as not in
accordance with law.”6 And some three weeks afterwards,
they instituted in the Court of First Instance of Pasay
City, an action against the RFC, the Escueta Spouses,
and the Hernandez Spouses, for (1) the nullification of (a) the deed of
assignment by the Escuetas in favor of the Hernandez
Spouses, (b) the latter’s redemption of the property in question, and (c) the RFC’s revocation of its deed of conditional sale with the Tambuntings; (2) the declaration of the validity of said
deed of conditional sale in their favor; (3) the payment of damages by the
defendants; and (4) the payment by the Escuetas,
particularly, of rentals in arrears for their use and occupation of one of the
apartments standing on the mortgaged property. 
This action, docketed as Case No. 1686-P, was the Tambuntings‘
second involving the same property, their first, Case No. 1565-P, being one for
the foreclosure of their second mortgage.1

The Tambuntings also amended their complaint
in the first action.2 They alleged that –

1)  the deed of assignment of
the Escuetas‘ right of redemption in favor of the Hernandezes was null and void because “fictitious or
simulated,” and violative of the Deed of Second
Mortgage of which the assignors and the assignees had notice;

2)  the redemption sought to
be exercised by the Hernandezes was invalid because
(a) the amount deposited (down payment of P19,088.89) was not the full
redemption price (P55,000.00) exclusive of costs, insurance premiums, interest,
taxes, attorney’s fees and liquidated damages, and (b) was not accompanied by
an offer to pay the Tambuntings‘ mortgage credit; and

3)  if the verdict in Civil
Case No. 1686-P uphold the redemption by the Hernandezes
and the RFC’s right to revoke its contract of
conditional sale with the Tambuntings, then the
latter’s second mortgage should be enforced on the property in question.

The two cases were consolidated,3 and decided jointly.4
The Trial Court’s judgment went against the Tambuntings,
and disposed of the cases as follows:

1)  the preliminary
injunction earlier issued, restraining the defendants from taking possession of
the property in question was lifted and set aside;

2)  the Deed of Conditional
Sale between the RFC (which had in the meantime become the Development Bank of
the Philippines
[DBP]) and the Spouses Tambuntings was declared null
and void;

3)  the Deed of Assignment of
the Escuetas‘ right of redemption in favor of the Hernandezes was pronounced to be valid and subsisting; and

4)  the Tambuntings
were ordered to refund to the Escuetas and Hernandezes “whatever excess rentals there may be from
plaintiffs’ (Tambuntings‘) collection on the
mortgaged properties after deducting therefrom the
down payment of P14,928.80 and the monthly amortizations paid by said
plaintiffs to defendant RFC under said Deed of Conditional Sale, and ** to pay
the costs.”

The Tambuntings appealed to the Court
of Appeals, but there they fared no better. 
That Court affirmed the Trial Court’s decision in toto1
and subsequently denied the Tambuntings motion for
reconsideration.2
Hence, their present recourse to this Court.

The Tambuntings‘ submissions in this
Court are substantially the same as those they laid before both the Trial Court
and the Court of Appeals, to wit:

1) the Escuetas‘ deed of assignment in
favor of the Hernandez Spouses violated the terms of the Tambuntings‘
mortgage’ and was fictitious, to boot;

2) even if the assignment were valid, there had been no valid exercise
of the right of redemption thereby assigned; and

3) the assignment was “designed to deprive petitioners (Tambuntings) of the credit they extended; so that
petitioners are also entitled to the damages prayed for under the(ir) complaint.”

The Tambuntings‘ appeal must be
rejected and dismissed for lack of merit.

In the first place, the matter of whether or not the assignment
was fictitious is an issue of fact and its resolution by the Court of Appeals
is, by firmly established and long observed principle, final and conclusive on
this Court.  Moreover, the Escuetas right to redeem the property within one (1) year
from September 16, 1955 was
never in any doubt.  As much is explicit
in the Deed of Conditional Sale already referred to which documented the Tambuntings‘ redemption of the property as second
mortgagees and provided for its own automatic invalidation upon the exercise by
the Escuetas (or their successor-in-interest) of
their own right of redemption within said period.

Now, the theory of a fictitious transfer of the Escuetas‘ right of redemption is sustainable only on the
premise that such transfer somehow enlarged the scope of the right or extended
the period within which it might be exercised. 
It did neither, however.  Its only
effect was to put the transferee in the shoes of the Escuetas,
with exactly the same obligations to fulfill as redemptioner
and precisely the same period of time within which to do so.  As far as the Escuetas
were concerned, there was no advantage to be gained, no benefit to be derived,
no premium in simulating a transfer which altered none of the conditions for a
valid redemption, whether exercised by themselves or by a transferee.

In short, the Escuetas had nothing to
gain by going behind the scenes, as it were, and making redemption through a
dummy.  And even if it be assumed that
they in fact did so, that the redemption had been made for them and on their
behalf by the Hernandezes to whom; they had
“fictitiously” assigned their right of redemption, this would be
utterly inconsequential, not only because as already pointed out, there is no
question about their (the Escuetas‘) being entitled
to redeem, but also because the redemption was made strictly according to the
terms — as to down payment and other conditions — laid down by the RFC
itself.  Since, by the way, these terms
were precisely the same as those under which the Tambuntings
were initially allowed to redeem, it is illogical and improper, to say the
least, for the latter now to impugn them.

Also untenable is the contention that the deed of assignment
executed by the Escuetas in favor of the Hernandez
Spouses was violative of the Tambuntings‘
second mortgage and therefore, inefficacious. 
A mortgagor, by encumbering his property, does not ordinarily lose the
right to sell the same or create another mortgage over it, although of course
obliged, when exercising said right, to preserve and maintain the superiority
of the prior mortgagee’s rights.  Indeed,
recognition of the propriety of subsequent encumbrances is implicit in the
grant of the right of redemption by Section 6 of ACT 3135, as amended, in cases
of extra-judicial foreclosure of mortgage, to “any person having a lien
on the property subsequent to the mortgage or deed of trust under which the
property is sold,” in addition to the “debtor, his successors in
interest or any judicial creditor or judgment creditor of said debtor.”1

To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting,
married to Antonio L. Tambunting,2 does contain a provision that
“the property mortgaged shall not be * * the subject of any new or
subsequent contracts or agreements, saving and excepting those having
connection with the first mortgage with the RFC, without first securing the
written permission and consent of the MORTGAGEE.” But the provision can
only be construed as directed against subsequent mortgages or encumbrances, not
to an alienation of the immovable itself. 
For while covenants prohibiting the owner from constituting a later
mortgage over property registered under the Torrens Act have been held to be
legally permissible,1 stipulations “forbidding the
owner from alienating the immovable mortgaged,” are expressly declared
void by law.2
It is clear then that the stipulation against “subsequent agreements”
above mentioned had not been breached by the assignment by the Escuetas (to the Hernandezes) of
their right of redemption in connection with the mortgage constituted in favor
of the R.F.C.  The assignment was not a
subsequent mortgage or encumbrance, licitly comprehended by the prohibitory stipulation,
but was actually a sale or conveyance of all their rights in the encumbered
real property — in truth, an alienation of the immovable — which could not
lawfully be forbidden.  Moreover, since
the subject of the assignment to the Hernandezes had
“connection with the first mortgage with the R.F.C.,” it did not fall
within, but was explicitly excepted from, the prohibitory stipulation in
question.  Finally, it should not be
forgotten that since the Tambuntings, in their own
deed of conditional sale with the R.F.C., had accepted without demur the
provision that said contract could be revoked within one (1) year from
September 16, 1955 at the option of the RFC, as vendor, should the former owner
(Escueta) exercise his right to redeem the property;
and that the redemption of the property within said period by “the former
owner or his successor-in-interest” would render their
instrument of conditional sale “automatically null and void and without effect,”3
they cannot now assume a position inconsistent with said provision.

The execution by the Escuetas of a
second mortgage over their property had the effect of subjecting the same
property to the payment of two obligations. 
Both mortgage debts had to be paid by the mortgagors.  If they failed to pay either or both, the
unpaid mortgagee had the right to look to the property for satisfaction.  Each mortgagee had the right to foreclose the
mortgage; but obviously, the second mortgagee’s right was inferior and
subordinate to the first.  Prior
foreclosure by the second mortgagee could not affect the first mortgagee’s
rights at all; and if the first mortgagee foreclosed first, the second
mortgagee had the right to redeem; i.e., pay the first mortgagee’s credit,
together with all due interests and charges and thus acquire the property
mortgaged, subject to the right of redemption of the mortgagor.

On the other hand, the assignment by the Escuetas
of their right of redemption (as regards both mortgage obligations) to the
Hernandez Spouses operated as a transfer of the property itself, together with
its recorded encumbrances.  The
acquisition by the Hernandezes of the Escuetas‘ rights over the property carried with it the
assumption of the obligations burdening the property, as recorded in the
Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and
the Tambuntings. 
The Hernandezes, by stepping into the Escuetas‘ shoes as assignees, had the obligation to pay the
mortgage debts, otherwise, these debts would and could be enforced against the
property subject of the assignment. 
Stated otherwise, the Hernandezes, by the
assignment, obtained the right to remove the burdens on the property subject
thereof by paying the obligations thereby secured; that is to say, they had the
right of redemption as regards the first mortgage, to be exercised within the
time and in the manner prescribed by law and the mortgage deed; and as regards,
the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption.1

The Tambuntings were perfectly within
their rights when they offered to redeem the property in question after it had
been foreclosed and acquired at public auction by the RFC.  And it was correct for the RFC, in accepting
the Tambuntings‘ offer and acquiescing to their
redemption of the property, to make such redemption subject to the Escuetas‘ own right of redemption, which was exigible against the RFC itself.  Hence it was that the Deed of Conditional Sale
executed consequent upon that redemption between the RFC and the Tambuntings, expressly provided in language that could not
be made any plainer that – 2

This contract may be revoked within one (1) year from September 16, 1955 at the option of
the vendor should the former owner exercise his right to redeem the property
herein sold.  In case the property is
redeemed or repurchased within said period by the former owner or his
successor-in-interest, the vendor shall refund to the vendees any and all amounts
that the vendees may have paid to the vendor under the conditional sale with
interest as provided for by law, rendering thereby this instrument
automatically null and void and without effect.

The Court has been cited to no fact or argument invalidating this
stipulation.  The Tambuntings
make no claim that their consent to the deed of conditional sale was in any
manner flawed, or that the stipulation is contrary to law, morals, good
customs, public order, or public policy.1 The stipulation is a perfectly legitimate
one.  The Tambuntings
are bound by it.

There is no dispute either about the fact that the redemption by
the Hernandezes, as assignees of the mortgagor
spouses, the Escuetas, was made within the time and
in the manner laid down by law and the RFC itself.  Their redemption was deemed by the RFC to
have been properly exercised.  The RFC
therefore revoked its contract with the Tambuntings,
as it was bound to pursuant to the explicit provision thereof above quoted —
indeed, that contract was, by its terms, rendered “automatically null and
void and without effect” by the redemption — and executed in the Hernandezes‘ favor a deed of conditional sale,
substantially identical to that earlier signed in favor of the Tambuntings.

Nor can there be any question about the effects of that
redemption by the Hernandezes as far as the Tambuntings are concerned. 
By reason thereof –

1)  the Tambuntings
acquired the right to a refund of “any and all amounts that ** (they) may
have paid to the ** (RFC [DBP]) under the conditional sale with interest as
provided for by law;” and

2)  their credit against
the Escuetas, and their right to foreclose the second
mortgage given as security therefor -­- and now still
subject of Civil Case No. 1656-P of the CFI (now RTC) of Pasay
City — remained unaffected and intact, subject, of course, to the equity of
redemption which the Hernandezes may exercise as
assignees of the Escuetas.

WHEREFORE, the petition for review on certiorari is
DENIED, and the judgment of the Court of Appeals thereby challenged is
AFFIRMED, with the modification hereinafter decreed.  The case is accordingly remanded to the Trial
Court for a determination not only of (1) the “excess rentals there may be
from plaintiffs’ (the Tambuntings‘) collection on the
mortgaged properties” to be refunded by said Tambuntings
to the “defendants spouses Escueta and
Hernandez” — counted from the date that the Tambuntings
were notified in writing by the RFC of the revocation of the deed of
conditional sale executed in their favor — “after deducting therefrom the down payment of P14,928.80 and the monthly
amortizations paid by said plaintiffs to defendant RFC under said Deed of
Conditional Sale,” as ordained by the judgment of the Trial Court, but
also (2) the balance of the Tambuntings‘ mortgage
credit against the Escuetas, together with all
stipulated interests and charges, which the Hernandezes,
as assignees of the Escuetas, are bound to pay to the
Tambuntings within ninety (90) days from finality of
that determination, in default of which the property shall be sold at public
auction in accordance with the provisions of Rule 68 of the Rules of
Court.  Costs against petitioners.

Cruz, Gancayco, Griño-Aquino,
and Medialdea,
JJ., concur.

1
ART. 1306, Civil Code; Peo. v. Pomar, 46 Phil. 440; Phoenix Assurance Co. Ltd. v.
United States Lines, 22 SCRA 674; Baluyot v. Venegas, 22 SCRA 442; Lazo v.
Republic Surety & Ins. Co., Inc., 31 SCRA 329; Phil-American General
Insurance v. Mutuc, 61 SCRA 22, 23

1
The first loan was obtained on September
6, 1952, in the sum of P56,000.00 (Exh.
A).  The second was obtained on January 22, 1953, in the amount of
P3,000.00 (Exh. A-1)

2
EXHS. C, C-1

3
Exhs. C-2, C-3, M, M-1

4
The action, commenced on June 27, 1955,
was docketed as Civil Case No. 1565-P (Exh. Q)

5
Exhs. D, D-1 and D-2. 
Sec. 6, Act No. 3135 as amended by Act No. 4118, grants the debtor, his
successors in interest or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property subsequent to the mortgage
or deed of trust under which the property is sold, the right to redeem the same
within the term of one year from and after the date (of registration) of the
sale.

6
Exhs. E, E-1

7
Exh. F

8
Exhs. F, F-1

9 Exh. G, dated April 14, 1956

10 Exh. 4-A-Escuetas; Exh. 4-A-1-Hernandez

1 Exhs. G, G-1 to G-32

2 Exh. 5-A

3 The deed of assignment is dated September 13, 1956, Exh.
1-A

4 The letter was dated December 15, 1955 (Exhs. 3,
3-A)

5 Rec. on App., p 78

6 Letter dated Sept.
17, 1956 (Exhs. J, J-1 to J-3_

1 SEE footnote 3, p. 2, supra

2 Rec. on App., pp. 74-79

3 Id.,
p. 352

4 Id.,
pp. 374 et seq.

1 Rollo, pp. 40 et seq.  The appellate court’s decision was
promulgated on April 7, 1980.

2 Id.,
p. 68.  The petition for review was filed
on August 9, 1980. It was
given due course, by Resolution of the then Second Division of December 10, 1980

1 See footnote 4, p. 2, supra.  In judicial foreclosure, there is the same
recognition:  viz,
Secs. 1 of Rule 68, which speaks of “persons
having or claiming an interest in the premises subordinate in right to that of
the holder of the mortgage;” Sec. 3 of the same Rule, which deals with
“persons holding prior encumbrances upon the property or part
thereof;” Sec. 4, same Rule, which adverts to “junior incumbrances.”

2 Rollo, p. 70:  Record on Appeal, pp. 10 et seq

1 Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the Philippines
v. Ty Camco Sobrino, 57 Phil. 801

2 ART. 2130, Civil Code

3 SEE footnote 9 at page 2, supra

1 SEE Limpin, et al., v.
I.A.C., et al., G.R. No. 70987, Sept.
29, 1988, for distinction between right of redemption and equity of
redemption.

2 SEE footnote 9, at p. 2, supra

1 ART. 1306, Civil Code