G.R. No. 191109 - Republic vs. City of Paranaque

The case involves C. N. Hodges (the recurrent) against Carmen Regalado and Maria Gay (the recurridas).
On June 14, 1928, the recurridas contracted to purchase three parcels of land from the recurrent. Two parcels were located in the municipality of Hollo and one in Bago, known in the respective cadastres as lotes "210-B", "4280-B", and "8123".
The agreed purchase price was P717,362.80, to be paid within a period of 10 years from the execution of the deed of sale (Exhibit 1), with interest imposed at 1% per month payable semi-annually in advance.
The sale contract (Exhibit 1) specifically provided, among other stipulations, for:

An immediate constructive possession for the vendees, with rights to collect rents from any occupants.
Obligations by the vendees to maintain, repair, and insure the properties against fire losses as well as to timely pay all taxes and assessments.
A clause deeming time to be of the essence whereby failure to pay any installment or interest would result in the total price becoming immediately payable, inclusive of an additional penalty of 10% to cover attorney’s fees.
Provisions allowing the vendor to rescind the contract if the vendees defaulted, with any payments made being treated as rents or forfeited for the vendor’s benefit.

After three years from the execution of Exhibit 1, the recurridas failed to make any payments, neither on the purchase price nor on the agreed interest.
On this ground, the recurrent instituted civil case No. 9794 in the Iloilo First Instance Court seeking:

The rescission of the contract of sale (Exhibit 1).
The restoration of possession of the properties.
Payment of rent at P175.66 per month from December 14, 1931, until the properties were returned.

A state of account (Exhibit C) was presented on May 13, 1931, detailing the sums due, including various charges (taxes, attorney’s fees, cash advanced items, registration fees, and interest computations).
Concurrently, the recurrent demanded that the recurridas execute a promissory note (Exhibit A) acknowledging a balance of P7,492.05 and, similarly, required Carmen Regalado to furnish a mortgage deed (Exhibit B) to secure said amount.

On March 14, 1934, due to non-payment of his credit—now allegedly amounting to P10,235.16 as computed from:

P7,492.05 (as per Exhibit A).
P2,472.36 representing interest on the promissory note for 1932 and 1933.
P235.38 plus P35.37 representing taxes and related interest on amounts paid for property improvements or charges.

The recurrent initiated a suit against Carmen Regalado to enforce the mortgage (Exhibit B) and thereby collect his claimed indebtedness.
During the litigation, Carmen Regalado and Maria Gay defended by asserting that the promissory note and the mortgage deed contained imaginary or usurious sums not reflective of actual transactions.
The Trial Court rendered a decision awarding the recurrent only a meager recovery, while the Court of Appeal confirmed that:

The amount of P7,492.05 indicated in Exhibit A did not represent a real debt.
The recurrent was not entitled to recover the full alleged credit due the rescission of Exhibit 1 having been granted on June 22, 1934.

The appellate court found that the recurrent’s simultaneous pursuit of a rescission (which mandated the return of the properties and the payment of their fruits) and the execution of the mortgage was inconsistent with legal principles.
The court noted that the amounts detailed in Exhibits A, B, and C were largely fabricated or inconsistent with the actual payment records and statements.
Consideration was given to several Civil Code provisions such as Article 1295 (effects of rescission), Article 1255 (invalidity of clauses against law, morale, or public order), and Article 1109 (rules on interest accrual), which played a crucial role in the Court’s decision.

Whether the promissory note (Exhibit A) accurately reflected the real debt claimed by the recurrent.
Whether the computations and amounts shown in the state of account (Exhibit C) were consistent with the actual transactions and payments made.

Whether the mortgage deed (Exhibit B) and the stipulations therein, including the imposition of additional attorney’s fees and interest on default, were legally enforceable.
Whether the imposition of certain penalty provisions contravened legal limits, especially in view of usury laws.

Whether the recurrent was entitled to pursue both the rescission of the contract (Exhibit 1) and, at the same time, enforce the mortgage (Exhibit B) to claim payments.
Whether such a dual remedy would result in double recovery or contravene specific provisions of the Civil Code regarding the rescission of contracts.

Whether the contractual clauses violated public policy by imposing conditions contrary to Articles 1255 and 1295 of the Civil Code.
Whether interest should only accrue judicially as mandated by Article 1109, thereby rendering the extra interest claims unsustainable.